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About Retirement Stock Trading Accounts

by Dave Guilford

Overview

Retirement stock trading accounts make up a large percentage of the average daily volume of the combined American stock exchanges. Retirement stock trading accounts are very popular because of the favorable tax treatment they receive, deferring all investment income and capital gains taxes until distributions begin after age 59 and a half. Even at that point, the funds are taxed at the investor's personal income tax rate. While most 401(k) and 403(b) accounts only allow mutual fund investing, the many varieties of Individual Retirement Accounts allow for trading in individual stocks.
Function

The function of an Individual Retirement Account (IRA) is to allow investors to grow their retirement savings tax deferred to help relieve the burden on the Social Security system and to provide the framework to save for retirement when an investor's employer doesn't offer a pension or retirement program. Investors buy stocks, bonds, and mutual funds in the expectation of their appreciation in value and do so within a retirement account to take advantage of the preferential tax treatment of the gains upon retirement and the tax deferred growth of the account in the meantime. The taxes and penalties incurred by an early withdrawal are enough to discourage most investors from cashing in retirement accounts before retirement age.

Types

There are many types of retirement stock trading accounts. Two of the most common, the 401(k) and 403(b) mentioned earlier, only allow mutual fund investing. The primary difference between these two accounts is that 401(k) accounts are offered to employees of private corporations and 403(b) accounts are offered to public employees, such as teachers and nurses. On an individual basis, there are several types of IRAs. The most common is the traditional IRA. Running a close second is the Roth IRA, created in 1997. The primary difference between the two IRAs is that a traditional IRA can be funded with pre-tax earnings (while a Roth IRA cannot), and the Roth IRA has much more liberal early withdrawal policies. Other popular types of IRAs include SEP IRAs (for self-employed individuals), SIMPLE IRAs (for small businesses that want to offer a retirement option to their employees), and Self Directed IRAs (which allow for investments into real estate and other non-traditional retirement assets). All IRAs have annual contribution limits and mandatory distribution ages.
Time Frame

Individual Retirement Accounts are available to all U.S. citizens age 18 and over. The sooner an investor begins saving for retirement, the better. Due to compounding, an investor who starts saving $2000 per year in an IRA at age 22 and stops at age 30 will have the same amount of money in his account at retirement as someone who started saving $2000 per year in an IRA at age 30 and continued until age 60 (assuming equal annual returns). Investors may begin withdrawing from their IRAs without penalty at age 59 and a half and must begin withdrawing from their IRA at age 70 and a half.
Benefits

Growth is greatly accelerated when taxation is not a factor. Taxation is easily an American's single largest expense over the course of his life. By protecting retirement savings from taxation with an IRA, an investor greatly enhances the likelihood of a comfortable retirement and decreases the risk of outliving his savings.
Warning

The penalties for early withdrawal of a retirement stock trading account can be severe. Often at a time when an investor can least afford it, taxes are attached to the amount withdrawn and a ten percent penalty is levied. Also, the premature distribution may push the investor into a higher tax bracket for the year, further complicating his tax situation. It is best to leave retirement accounts untouched until retirement.