Can You Buy Penny Stocks In An IRA? The Answer May Surprise You

What Are Penny Stocks

Penny stocks are shares of public companies that trade for less than $5 a share. While this broad definition of penny stocks seems simplistic, and it is, many people try to complicate things. If you speak to some of the Robinhood traders, they’ll tell you that penny stocks are “OTC stocks”, negating the fact that there are hundreds of penny stocks on Robinhood that trade for less than $5; some even less than $1.

Penny stocks are generally accompanied by high-risks. Many of these companies also have gaps in public information and/or financial reporting. So, if you’re looking into how to day trade penny stocks take time to do your research. This is key especially for those of you who actively trade. Understanding why a stock is moving is just as important as knowing how to find stocks that are climbing. A rumor may only fuel momentum for so long. In comparison, a big corporate update might leave a more lasting impression.

Learn More

• The Beginner's Handbook For Trading Penny Stocks
• How To Trade Penny Stocks

Additionally, don’t forget to check your sources. Don’t just look in a company’s newsfeed. Sift through corporate filings, check out its Twitter page, look for other places where a company has been vocal as these are usually idea for finding real-time info. We’ve discussed plenty of penny stocks in the past, which breakout, have no headlines, but the company tweeted something. Knowing how to find this information early can set you up for success.

Can You Buy Penny Stocks In An IRA?

Here’s a question that comes up every year, mainly around tax time. Can you buy penny stocks in an IRA? First, IRA refers to the Individual Retirement Account. Many of today’s investors want to benefit from short term trading by utilizing any investment account. So it’s no wonder why someone would ask, “Can you buy penny stocks in an IRA?” Similarly, people will also wonder, “Can I buy penny stocks with my 401(k)?“

You might associate IRAs with blue-chip stocks and traditionally “safe” investments. It isn’t unlikely to see shares of companies like Apple (AAPL Stock Report), Amazon (AMZN Stock Report), Exxon Mobil (XOM Stock Report), and even Facebook (FB Stock Report) in many IRAs. But, the fact of the matter is that these aren’t the only kinds of stocks to buy with an IRA.

Some IRAs can also be used to buy penny stocks; believe it or not. Some invest in their IRA by hiring an advisor. The advisor will hopefully guide you to invest it in a way that meets your specific financial goals. However, you should understand that trading with your IRA will involve certain fees if you want to take money out before retirement years. However, you can also invest in IRAs in a more self-directed fashion. Many platforms offer this option. Most of the best online brokers offer options to open and manage your own retirement account; IRAs included.

You have two ways in which you can invest an IRA in penny stocks:

• Hire an advisor and invest under their guidance. It has more chances of profitable results if you’re not an experienced investor.
• Invest on your own by collecting the required information and submitting it to your chosen brokerage account.

There are many apps and websites involved in this field like TD Ameritrade and E*Trade. However some platforms like Robinhood don’t allow this option as of right now. Penny stock investors are generally concerned about the fees and charges. So, if you are highly concerned about the transaction fees and charges, choose your broker accordingly.

Are Profits From Trading Penny Stocks In An IRA Taxed Differently?

Here is where the conversation gets interesting. Many of those looking to buy penny stocks in an IRA are expecting certain advantages. One of which, they hope to gain involves tax advantages. Now, there are certain advantages but always consult a tax professional to discuss the most updated rules.

When it comes to IRAs there are two types for individuals. These are the traditional IRA and a Roth IRA. Both allow you to contribute a certain amount of money. Here’s what the IRS says regarding that amount:

For 2021, 2020 and 2019, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than $6,000 ($7,000 if you’re age 50 or older), or If less, your taxable compensation for the year

Traditional IRA contributions may be tax-deductible however, this deduction might have limits if you or your spouse is covered by a work retirement plan, for example. Roth IRA contributions may be limited based on individual filing status and income and your contributions aren’t deductible.*

But What About Capital Gains Taxes On An IRA?

Again, consult a tax professional to get the most updated information. However, as it stands right now, in most cases, short- or long-term gains in your IRA aren’t taxed until you actually take the money out of the account. Since it’s technically a retirement account, you won’t be likely to touch that money for quite some time. When you do start taking qualified distributions, they’re typically taxes as ordinary income.

However, something important for younger traders, is this: You can take money out early, however, if it’s before age 59 ½, you might have to pay an additional 10% tax for early withdrawals.

Trading In An IRA FAQ

1. Can you buy penny stocks in an IRA?
   Yes, you can trade & buy penny stocks & blue-chip stocks in an IRA
   
2. Are profits from trading penny stocks taxed?
   In general short- or long-term gains in your IRA aren’t taxed until you actually take the money out of the account. But consult a tax professional to discuss your own, personal tax status and consequences.
   
3. Can you take money out of your IRA early?
   Yes, you can take early distributions from your IRA
   
4. Are there tax consequences to early distributions?
   Always consult a tax professional, however, in general, early distributions do incur an additional tax – usually around 10% – on top of ordinary income tax.

End Notes:

https://www.irs. gov/retirement-plans/traditional-and-roth-iras