Can I Short Stocks Within Fidelity Roth?

You can invest up to $5,000 a year into a Fidelity IRA.

An individual retirement account (IRA) is an account you can open with Fidelity and many other financial institutions that allows your money to grow tax-free until you retire. Taxes can have a significant impact on how quickly your investments grow, so deferring tax can be a significant advantage that saves you a great deal of money over the years. While you cannot sell short inside a Roth IRA account, there are alternatives to short selling you can use.

Roth IRAs

There are two basic types of IRA accounts offered by Fidelity and other financial institutions, Roth and traditional. Money you invest in a traditional IRA can be deducted, reducing your taxable income. With a Roth IRA, you invest money that you have already paid taxes on. Money held inside both types of IRAs is protected from taxes until you retire and start to withdraw.

Short Selling

Short selling offers a way to profit when stock prices decline. To sell short, you borrow stock from your broker, sell it, and if the price declines, you can buy it back at a lower price, profiting from the difference. Unfortunately, Internal Revenue Service rules prohibit you from borrowing money or securities in an IRA. Since selling short involves borrowing securities, short selling is prohibited inside both types of IRAs.

Short Selling Alternatives

Inverse exchange-traded funds (ETFs) offer a way to profit from falling stock prices that is perfectly legal inside an IRA. An inverse ETF is designed to rise when the market index it represents falls. For example, QID is an inverse ETF that rises when the price of the Nasdaq index declines. You can buy shares of QID and other inverse ETFs inside your IRA account.

Inverse ETF Warning

Historically, stock prices have steadily risen over time. While prices have sometimes declined from one year to the next, declines can look like bumps in a rising road when you view long-term price charts. An IRA is designed to help you save money over the long term for retirement. When you buy an inverse ETF you are betting against the market. While you can profit with them over the short term, an inverse ETF is probably a poor long-term investment.

References

• Fidelity: Understanding IRAs
• Journal of Accountancy; The Dos and Don'ts of IRA Investing; Robert Preston; April 2000
• IRS: Retirement Plans FAQs regarding IRAs