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Since IRAs are only taxed when you take the money out when you retire, are the normal tax implications of short term trading non-existent? Thereby making it extra beneficial to do your short term trades in an IRA and long term trades outside?

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Indeed, there's no short term/long term issue trading inside the IRA, and in fact, no reporting. If you have a large IRA balance and trade 100 (for example) times per year, there's no reporting at all.

As you note, long term gains outside the IRA are treated favorably in the tax code (as of now, 2012) but that's subject to change. Also to consider, The worst thing I did was to buy Apple in my IRA. A huge gain that will be taxed as ordinary income when I withdraw it. Had this been in my regular account, I could sell and pay the long term cap gain rate this year.

Last, there's no concept of Wash sale in one's IRA, as there's no taking a loss for shares sold below cost. (To clarify, trading solely within an IRA won't trigger wash sale rules. A realized loss in a taxable account, combined with a purchase inside an IRA can trigger the wash sale rule if the stock is purchased inside the IRA 30 days before or after the sale at a loss. Thank you, Dilip, for the comment.)

Aside from the warnings of trading too much or running afoul of frequency restrictions, your observation is correct.

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    >"there's no concept of Wash sale in one's IRA" I remember a discussion in misc.taxes.moderated in which it was pointed out that the IRS's position was that trading in the same (or similar) security, with one transaction inside the IRA and the other outside one's IRA, was indeed a wash sale. – Dilip Sarwate Aug 9 '12 at 13:38
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Yes. Of course, you still need to take into the account the trade costs (fees paid to the broker), these are not going anywhere.

Basically what it means is that you don't have to worry about long/short holding period within the IRA, they're all the same. It doesn't mean that long term trading is better or worse to have outside the scope of IRA, it just means that the concept doesn't exist inside.

  • "It doesn't mean that long term trading is better or worse to have outside the scope of IRA, it just means that the concept doesn't exist inside." - It does, if you are going to have long and short term trades either way, and arrange it so all you short term are in the IRA and all your long term are out. – David Jul 17 '15 at 23:34
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I will expand this to 401K's, 403B's, and the federal retirement program.

There are 3 things to worry about when trading:

  1. Taxes
  2. Transactions costs
  3. Frequency rules.

The tax friendly retirement programs will remove the worry about taxes. Most will reduce or eliminate the concern about transaction fees. But some programs will limit the number of transactions per month.

In the past few years the federal program has cracked down on people who were executing trades every day. While employees are able to execute trades without a fee, the costs related to each transaction were being absorbed into the cost of running the program. To keep the costs down they limited the number of transactions per month.

Some private programs have limited the movement of money between some of the investment options.

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