You Can Day Trade With Your Roth IRA and Beat the Tax Man—Here’s What You Need to Know

If you have a Roth IRA, you’re probably familiar with its main advantages: tax-free growth and tax-free withdrawals in retirement. You may have also heard that you can use your Roth IRA for day trading, where you’ll avoid taxes on your capital gains. While this is technically true, it’s quite tricky to successfully use your Roth IRA for day trading. In fact, you’ll usually have better returns with passive investing than day trading. Let’s take a look at the details.

Understanding Day Trading

Day trading is what many people imagine when they think of the stock exchange. It’s a fast-paced type of speculative trading that happens within a day, with people quickly trading securities to profit on the small price fluctuations.

There are a few aspects that define day trading:

• Short-term focus: The goal is to quickly profit from short-term trends rather than the fundamental value of securities.
• High risk: Day traders can experience significant risk, especially when starting out.
• Need for technical analysis: To know when to buy and sell, day traders must be skilled in technical analysis that predicts price trends and patterns.
• Need for high discipline and risk management: Day traders rely on fluctuations in the market, so they have to pay close attention to the market and be willing to stick to their trading criteria, even after suffering losses.

Benefits of Day Trading With Your Roth IRA

Unlike traditional day trading, which relies on borrowed money, individuals with Roth IRAs can use these funds to day trade. Although a Roth IRA is primarily designed as a retirement account, using the funds for day trading can be a smart move since it eliminates taxes on trading.

Specifically, it includes the following benefits:

• Any gains are tax-free: Unlike trading with a brokerage account, earnings and trades within a Roth IRA aren’t taxed.
• Withdrawals are more flexible: Since you’ve already paid taxes on the money when you invested it in the Roth, you can withdraw your contributions whenever you like, just not your earnings.
• You can enjoy short-term gains: You don’t need a separate brokerage account in order to take advantage of fluctuations in the stock market.

Potential Pitfalls of Day Trading With Your Roth IRA

If the idea of tax-free gains has you interested in day trading with your Roth IRA, consider that there are more drawbacks than that main benefit. Not only is it a risky way to use your retirement fund, but it’s actually very difficult to do.

Here are the reasons you may want to avoid day trading with your Roth IRA:

• You can’t margin trade: If you can’t margin trade as a day trader, you can’t move assets quickly enough to really profit from fluctuations in the market.
• You can’t make short sales: Another restriction that greatly limits your profitability is the fact that you can’t borrow stock in order to make short sales.
• You can’t deduct losses on your taxes: If your Roth IRA loses value while day trading, you can’t write off the losses when you file taxes.
• You may face additional requirements: If you make more than four or five trades a day, you’ll be subject to pattern day trader (PDT) restrictions. Specifically, you’ll have to maintain at least $25,000 in liquid assets (something that’s hard to do with a Roth IRA, which typically holds investments).

All these limitations can make it extremely hard to successfully day trade and turn a profit. In fact, passive investing has historically proven more profitable than day trading, which is why trading with your Roth IRA isn’t the best move.

The Bottom Line

If you’ve got a Roth IRA and you aren’t prioritizing it for retirement, you can technically use the funds for day trading and avoid taxes on any gains. That said, you’ll find it difficult to take advantage of fluctuations in the market since you can’t trade on the margins or make short sales. Because of this, and the increased risk that comes with day trading, most advisors won’t recommend day trading with your Roth IRA.