In college - should you trade in a Roth IRA account?
So,
If you are in college in the lowest tax bracket, should you be trading in a Roth IRA account?
Talking simply, pay the lowest tax rate you will ever pay, have the ability to take out all your initial investment, and then no taxes on any of your trades. In the future, you can take out earnings to help pay for graduate college expenses if you need, medical expenses, house at with no penalty.
For a specific broker,
I use Interactive Brokers - any reason to use something different if a Roth is indeed a good idea?
Thanks,
Forrest
A few things to keep in mind:
1) You're probably going to lose money. You're going up against guys that do this 40, 50, 60 hours per week for a living and they lose money regularly.
2) Do it if you want to go into something markets-related and want to show that you have a passion for it. Focus on one sector, learn everything about it, and come up with a strategy.
3) I don't know if this applies to Interactive or to Roth IRAs, but in trading accounts I've seen, the fees would eat you alive. Most platforms I've looked at charge a fee of ~$7 per trade. Two ways to look at that in a $700 account: you're out of money in 700 trades if you break even or you have to make $7 per trade just to stay alive.
Just did a quick search when I realized I might not know wtf I'm talking about, and this article seems to touch on the question: http://www.bankrate.com/finance/retirement/actively-trade-in-roth-ira.a…
He uses IB so he has at least $10000. What are your returns OP?
Unless you're planning on going to college and buying a house in your 60s, I don't think you can do this.
If you're thinking about using IRA money to pay for college, taking money out from a traditional IRA would actually be a far better choice than a Roth IRA. The idea is, if you go back to school full-time, your income level is probably going to drop. Since you'll be taxed on all of a distribution from a traditional IRA, you'd want to take a distribution when you don't have a lot of other income to push you into a higher tax bracket (thus paying a lower effective rate on the distribution). In contrast, you'd want to take a Roth distribution when you're in a higher tax bracket, as the distribution would be non-taxable to you (assuming it's a qualified distribution).
Now as goblan noted, unless you're planning to do this in your 60s or putting money towards your first home, your distributions are not going to be qualified distributions. This means any earnings over your contributions to your IRA are going to be taxable to you. You'd also be penalized 10% on the taxable part of the distribution that is not a qualifying distribution. However, there are many exceptions to the 10% penalty, some of which you mentioned such as qualifying education expenses, medical expenses, ect.
As with any tax planning, the best way to go about it is to do pro-formas on different scenarios, i.e. how much tax you would owe with a Roth vs. traditional distribution vs. taking out student loans or whatever. From my personal experience, I distributed my Roth IRA when I went back to school my first year (I had six months of wages from my previous job), and took out traditional IRA money my second year of school (when I didn't have any other source of income) to reduce the overall amount of taxes I would pay on my distributions. I should also note that there is NO exception for education if you take out money from a 401(k), so be wary of that as well.
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