Traders are constantly on the lookout for the best strategies to improve their trading decisions. One of the most common challenges that traders go through is figuring out which accounts they need to trade. Which one is better to trade – the retirement account or the taxable brokerage account? If you want to make sure you make the right decisions, it is best to better understand the options first and weigh out the pros and cons.
Trading your retirement account can have numerous benefits. One of the biggest advantages you can get from doing this is you will get the ability to defer tax payments on gains you’ve earned. With this strategy, you can grow your account at a fast rate. You can efficiently build wealth without generating additional cash flow. However, take into consideration that you won’t be able to withdraw money from your retirement account before 59 without incurring a penalty.
Those in higher tax brackets, you can deduct contributions to your retirement account from your existing taxable income and this creates immediate tax savings. Here’s an example: If you are over 50 and married with an adjusted gross income of about $250,000 and you contribute $24,000 per year, you can reduce tax liability by $8,000. Those in lower tax brackets during retirement, you can withdraw funds at a lower tax bracket and increase your savings. When you turn 60, you can create a tax-free income stream with a Roth account.
There are some cons in trading retirement accounts too. This includes not being able to use margin in a retirement account, shorting stocks and losing the favourable 60/40 split when you are trading futures.
When it comes to trading taxable accounts, the opportunities are greater because you can trade in all formats such as covered calls, straddles, strangles, naked puts, iron condors and more. You will be able to short stocks, trade on margin, futures commodities, forex and more. Traders will be able to enjoy the freedom of trading with the kind of strategy they prefer.
In addition to the trading freedom, this can also allow you to qualify as a trader in securities – a special kind of tax status that allows you to claim expenses associated to trading. Unlike with the default investor status, you will be able to treat trading as a business and incorporate strategies so that you can reduce taxable income.
However, there is a big disadvantage associated with trading taxable accounts and that is having to pay taxes on the gains made every year. If not done properly, this can negatively affect the pacing of your growth.
If you don’t want to choose between the two, then you don’t have to. You can just trade both accounts and enjoy the advantages of the two. An effective technique to pull this off is by trading securities (stocks, mutual funds, etc.) in the retirement account and trade futures and forex in the taxable account.
Need a more customized plan? Reach out to one of our tax advisors for a consultation!