Roth Individual Retirement Accounts (IRAs) and 401k accounts share some similar features, such as the tax-free growth of the investments within, but beyond that they are quite different. Roth IRA accounts are after-tax vehicles, meaning that distributions from the account are generally tax-free. The 401k accounts, on the other hand, are funded pre-tax, meaning that while they too offer tax-free growth within, upon withdrawal all of the funds are taxable at regular income tax rates. Thus, the strategies for trading stocks within the 401k and Roth IRA can be different as well.
Review your account restrictions. Many 401k plans are managed by mutual fund companies or other investment houses, and do not even allow the trading of individual stocks. Rather, investors are restricted to choosing among various mutual fund options. If this is the case in your particular 401k, you can obviously stop your stock research immediately. Similarly, Roth IRA accounts have some investment restrictions as well, and it pays to discover what these are before you begin your stock trading analysis. Usually, Roth IRA restrictions are limited to more obscure items, such as collectibles or life insurance, but if any of these securities trade on a stock exchange and appear to be stocks, they would be restricted. In this case, you should check with your IRA custodian before you embark on your investment plan.
Determine if you are a stock trader. Retirement accounts such as the 401k or Roth IRA are intended by definition for long-term growth. While you may be physically able to trade stocks in your retirement accounts, a question to ask is if you should, or if you should instead build a long-term, diversified, comprehensive portfolio. Trading stocks requires a lot of time, focus and analysis, and is generally considered a short-term investment strategy, not a long-term financial plan. That being said, the tax-advantaged features of retirement accounts is definitely of benefit to active traders, who may otherwise incur large short-term taxable gains.
Research your stocks. Once you have ascertained that you are allowed to trade stocks in your 401k or Roth IRA, you should perform the same due diligence in terms of analyzing your stocks as you would in any regular taxable investment account. In other words, although the tax-free growth of your investments is a plus in these retirement accounts, the analysis of whether an individual stock is a good investment should not be affected by its taxation. Factors such as cash flow, prospects for growth, return on invested capital, market sentiment and chart behavior are all basic tools for stock analysis, and should be performed on any stocks you wish to trade. When it comes to selecting specific stocks to trade in your investment accounts, you may want to consult a financial adviser.
Place your trades. Whether you work through a financial adviser or manage your own online account, once you have done your analysis, enter your trades and monitor them closely. Establish limits or goals on your investment results, so you have the discipline to sell a stock—or buy more—as conditions warrant.