It's never too early to start planning for a secure future. An individual retirement account or IRA is a very flexible savings plan to provide money for your retirement. You can put up to $5,000 a year into an IRA -- or $6,000 if you 50 or older -- with tax advantages. If you contribute to a traditional IRA, you don't pay income tax until you take the money out at retirement. With a Roth IRA, you pay tax on the money now, but both your contributions and any interest are tax-free when you retire.
Use Traditional or Roth IRA
When you open a traditional or a Roth IRA, you can use that account to buy -- and sell -- individual stocks. You set up an account at a brokerage firm, or through a broker, as a "self-directed account" in the name of the IRA. Then you can buy and sell stocks any time you wish as long as all money stays in the IRA brokerage account. You won't pay taxes on any profits you make when you sell stocks in your IRA account.
Buying Outside an IRA
You can invest in stocks outside your IRA, too, but you'll have to set up a separate brokerage account for these transactions. You won't have any tax deductions and you may have to pay capital gains tax on profits you make from selling stock. However, you are free to take out any profits from the non-IRA account to use for other purposes -- and there's no limit on how much you can invest.
IRA Trading Restrictions
There are more restrictions on trading stocks through an IRA. You can't buy on margin, putting up part of the price and borrowing the rest, like you can in a regular brokerage account. You have to wait at least three days after you sell a stock in your IRA account before you can use the proceeds to buy another stock. You also can't "short" stock; that is, you can't sell shares you don't own in anticipation the stock price will drop before you have to deliver the stock. When you short sell, your broker borrows shares from someone who owns them. You promise to return them later, and then immediately sell the borrowed shares at the current market price. When the price of the shares drops, you buy back the shares. Your broker returns them to the lender. Your profit is the price difference between your selling price and your buy-back cost, minus commissions and expenses for borrowing the stock.
Buy Any Type of Stock
You can buy publicly traded or closely held stocks -- or almost any other type of security, such as mutual funds, exchange-traded funds, real estate investment trusts or bonds. The only major disadvantage to buying stocks through an IRA is that you can't withdraw that money or any profit from stock trading until you're 59 1/2 without paying a withdrawal penalty.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.