What Are Penny Stocks
Penny stocks, defined as shares trading at less than $5 each, offer a unique slice of the stock market. This straightforward definition often gets muddled in conversation. Contrary to some beliefs, penny stocks aren’t limited to Over-The-Counter (OTC) markets. In fact, platforms like Robinhood list numerous penny stocks, with some even trading below $1.
The journey into penny stocks is fraught with risks. These companies frequently lack comprehensive public disclosures or financial reports, making informed trading a challenge. For enthusiastic day traders, diligent research is non-negotiable. Grasping the underlying reasons behind a stock’s movement is crucial, just as much as spotting upward trends. While fleeting rumors can drive short-term spikes, substantial corporate developments tend to have a more enduring impact.
Diverse sources should inform your research. Don’t rely solely on a company’s official announcements. Delve into their financial filings, social media presence, and other communication channels to glean timely information. We have seen instances where a mere social media post from a company has sparked significant movement in its penny stock, underscoring the value of early information discovery.
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 (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Exxon Mobil (NYSE: XOM), and even Meta Platforms (NASDAQ: META) 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 your 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:
Traditional IRA contributions may be tax-deductible however, this deduction might have limits if you or your spouse is covered by a workplace 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 taxed 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
- Can you buy penny stocks in an IRA?
Yes, you can trade & buy penny stocks & blue-chip stocks in an IRA.
- 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.
- Can you take money out of your IRA early?
Yes, you can take early distributions from your IRA but you may incur penalties if you do so before retirement age.
- 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.