Considerations for Trading in a Retirement Account

Before anyone begins trading in a retirement account, they should make sure to understand the rules of the road. There are different types of IRAs, each with different benefits, limitations, and requirements, depending on specific situations and the trader's financial goals. 

Retirement accounts are generally not ideal for short-term goals like buying a car or saving for college expenses, because depending on the type of account, there are rules for withdrawals, penalties, and distributions. With few exceptions, early withdrawals carry a penalty, which is why traders and investors need to understand the fine print before opening—or trading in—an account. 

With a clear understanding of general guidelines and account types, traders can then focus on other factors that can determine how (or if) active trading within an IRA aligns with their objectives. 

Determining an appropriate risk tolerance level is a key part of figuring out whether or not to trade in a retirement account, as well as what strategies to consider. Generally, risk tolerance is connected to a trader's investing horizon—time until anticipated retirement—and tends to decline as the trader ages. Some younger traders who have decades to allow their portfolios to weather market ups and downs might opt for more risk to try to produce more return. 

In contrast, traders approaching retirement who want their retirement accounts to provide relatively stable income might gravitate toward a more conservative approach using less-risky alternatives. Traders must consider their personal goals and situations to determine their risk tolerance level before actively trading in a retirement account. 

Once a trader has appraised their risk level, they'll have a better sense of how much to allocate to active trading in their retirement account and how much to keep invested for the long term. Traders who are comfortable taking on more risk might allocate a greater percentage of their portfolio to active trading compared to those who are more risk-averse, leaving the rest to a longer-term, diversified investment approach. 

As with any trading account, professional financial advisors typically recommend having a healthy amount of diversification. Dumping everything into one investment or asset type is rarely a good idea. But remember: Asset allocation and diversification don't eliminate the risk of experiencing investment losses. And no matter how much or how little a trader chooses to allocate to active trading in their retirement account, they should consider having a separate liquid account dedicated to emergency funds. Tapping into retirement funds early to meet unexpected expenses comes with potential opportunity loss and likely withdrawal penalties. 

Trading actively in a retirement account has the advantage of allowing traders to respond to market trends. As a trader's investment goals, time horizon, and risk tolerance levels change throughout life, they can reshape their investing styles, including how they approach trading in their retirement account. 

This flexibility can turn south, however, if emotions take over and prompt impulsive buying and selling decisions.

Professional advisors recommend developing a plan for trading in a retirement account, including a strategy for what to do during downturns. Another recommendation is to carefully reassess all allocations on a regular schedule to ensure the risk versus return still aligns with the long-term strategy. None of these considerations are of the set-it-and-forget-it variety; it's always important for traders to regularly re-evaluate their situation and their trading approach.