As a fan of index mutual funds for the long term, I’ve stuck with first TIAA-Cref and currently Vanguard for my IRAs. I started with TIAA-Cref because when I first discovered Roth IRAs, I didn’t have enough saved to qualify for Vanguard’s minimums. Both brokerages offer low-cost options for those who want to invest in index mutual funds for the long term.
If you are interested in more active investing, your IRA might be a better vehicle than a taxable brokerage account. In a non-retirement account, every time you sell after a stock’s price goes up, you could be subject to an income or capital gains tax. This payment to the government accompanies any transaction fees the broker might charge. Furthermore, if your investment pays dividends, you will owe more tax on that income.
All of these, except for the transaction fees, can be avoided by taking your trading to an IRA. These retirement accounts are tax-free until you retire, at which time only your withdrawals from taxable Traditional IRAs will generate a bill from the IRS. Tax laws could always change in the future, and I guarantee they will. Based on today’s tax laws, some investors could fare better by following this plan.
There is a downside: if you sell a stock in your IRA at a loss, you cannot use that loss to offset that year’s income in an effort to reduce that year’s tax liability. That feature is only available when trading in a taxable investment account.
Just about every discount brokerage offers IRAs allowing stock transactions. Here are a few suggestions.
Scottrade offers IRAs with no account maintenance fees or termination fees, and charges a commission of $7 per trade. A few years ago, I moved my taxable brokerage account to Scottrade from Wachovia when that bank began charging an annual fee, and although I haven’t had much activity, I haven’t encountered any problems with Scottrade.
Tradeking charges a low commission of $4.95 per trade and, like Scottrade, does not charge any maintenance fees. This is simply one of the least expensive options for trading stocks in a retirement account.
Zecco actually has TradeKing beat with $0 trades in some circumstances. With a $25,000 balance or 25 trades each month, you can qualify for free trades at Zecco; otherwise, each trade will cost $4.50, still slightly less than TradeKing. Unfortunately, Zecco charges an annual maintenance fee of $30.
What do you think about actively trading stocks in an IRA? Active trading is not the right approach to investing for most people. But if you’re going to make the decision to try your hand in the stock market, using an IRA could help you save money.
Updated September 2, 2011 and originally published April 22, 2010.