One Way to Minimize Future Capital Gains Now
If you’re reaing this, you’re either an active trader or thinking of trading more frequently. We all expect to make money through our trading and accrue capital gains. We accept paying capital gains taxes as an inevitable reality. But does this need to be the case? No! Trading profitably is hard enough; giving a large percentage of hard-earned gains to Uncle Sam makes it even harder.
As an active trader, by taking the steps outlined below andsticking to them, you can defer thousands (or tens of thousands of dollars). If you contribute to and make your tradees in Roth IRA you will NEVER pay taxes on these gains. Interested? Read on!
Open or Add Funds to Your IRA
If you have not made an IRA contribution yet for the 2020 tax year – the time to do it is now – prior to the May 17 tax deadline. Open an IRA at your current discount brokerage and transfer funds that you know you won’t need to touch until you’re 59½ years old. You can transfer up to $6000 (or $7000 if you are 50 or older).
Think of Your IRA as a “TDA” (a “Tax Deferred Account,” not a “Retirement Account”)
A TDA is a more accurate description of an IRA. Now with this new and improved name, it’s now easier to think about using the account to trade without tax efficiency constraints. This is perfect for trades you typically see on the Trade Exchange platform, like swing or momentum trades lasting several days or weeks. Concentrate some, or all, of this type of active trading in your TDA.
In a TDA, there are two major limitations that you do not have in a taxable account. Knowing these limitations in advance will help you to carry out appropriate trades in your TDA:
- Government regulations prohibit you from using TDA assets as collateral. As such you cannot trade on margin in a TDA
- You cannot “day trade.” Stock and bond trades (both buys and sells) are typically settled in 3 business trades. As such, a TDA is best suited for multi-day trades, like swing trades.
Limiting Active Trading to a TDAs Can Help to Grow Your Assets Faster
The impact of actively trading in a Roth or Traditional IRA can be profound. This is especially true if you stick to this approach for years. Assume:
- John sets aside $6000 per year for 10 years
- Generates a 10% annual gain
- He would have close to $89,000 in assets (great)
- But would have paid over $12,300 in taxes on average (not so great)
- Remember – John is doing his trading in a conventional, taxable brokerage account
Imagine his friend Jane does exactly the same trades and saves the same amount over 10 years, but does so in a Roth IRA. Jane ends up with over $105,000 and pays $0 taxes!.
If John and Jane stick to their respective plans over 20 years, assuming a 10% annual gain:
- John will pay over $61,000 more in taxes over 20 years
- Jane will accumulate over $175,000 more in wealth
Remember – this assumes, John and Jane are equally skilled in investing! Using Jane’s approach looks really appealing, right?
By the way, we are not trying to disparage “Buy and Hold.” Many active traders apply a “buy and hold” strategy with most of their assets. We believe that when you are employing both active trading and “buy and hold” as pieces of your investment strategy, it’s nearly always most efficient to actively trade in a Tax Deferred Account and “buy and hold” in a taxable account.
Get Trading Ideas from Experts on Trade Exchange
Our company, Trade Exchange, provides a great way for investors to receive trading ideas and stay nimble in today’s market. We have a range of experts:
- Experienced in different industries
- Many who focus on technical analysis – looking at charts and trading patterns
- Others who follow macroeconomic trends (e.g., Covid, green economy, China) to identify opportunities
No matter what their approach is, each expert provides specifics on what to buy, when and at what price. You’ll also get guidance on when to sell: profit targets and when to cut losses. You get commentary on the “why’s” behind their recommendations. As market conditions evolve they adjust their trades and explain why: hedging against earnings, protecting profits, taking profits because the stock moved quicker than anticipated.
With the Trade Exchange, you have experts delivering trade ideas to you and monitoring the ideas for you. They are incented to deliver a profit for you because they only get paid when you win.
Learn More About the Trade Exchange
Thanks for reading. Best of luck completing your taxes and wishing you the best of health!
Kyle Okimoto, President – Trade Exchange
The comments here represent the personal opinions of Kyle Okimoto and not those of Trade Exchange, Inc. Neither Kyle Okimoto nor Trade Exchange are tax experts; consult with your tax advisor for guidance specific to your situation. The 10% to 15% returns illustrated in the John and Jane examples are illustrative and should not be considered guarantees of future performance. Ideas delivered on the Trade Exchange platform can lose money. Every customer bears their own risk by following and trading on an investment idea.