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could be taxed as high as 30 to 40 percent between federal and state taxes. This means that you will keep only 60 percent of your profits and that is before you subtract your commission costs and other trading-related expenses. |
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One way for short-term active traders to trade free of capital gains concerns is to trade in a self-directed retirement account, such as a Keogh. I talk to many longer-term investors who, for whatever reason, simply have not considered this tactic. Obviously, those professional traders who are attempting to make their living from trading will not be able to avail themselves of this strategy. But there are hundreds of thousands of online traders who are fairly active, trading at least a few times per month or more. The size of this group will only grow, as the number of traders who are familiar with online trading and have the right technical tools for short-term trading increases. |
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It seems apparent that this is the direction we are moving in: more short-term traders utilizing varied short-term approaches and styles; more sophisticated trading tools, knowledge, and training; around-the-clock electronic markets; very low fee to free trading; and larger amounts of savings, retirement, and discretionary income that can be funneled into the market. And, most likely, greater volatility in price moves. |
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This suggests that larger numbers will become more active traders but choose to trade from a self-directed retirement account. The advantage of trading from a retirement account is that you don't have to consider short-term capital gainsbecause there are none. |
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The total worth of your portfolio when you finally retire and are ready to begin distributing it will be taxed as ordinary income at that time. The idea, of course, is that since you would be retired at that time, you will be in a lower tax bracket than you are now and therefore pay fewer taxes on the total value of your holdings. In addition, when you retire, you are not forced to begin to withdraw money from your retirement account. |
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If you have a Keogh, for example, it can be rolled over into an IRA until you are ready to begin distribution. Those who have independent, self-directed Keogh accounts lose the great benefit of having their contributions matched by their employer, as do those participating in 401-K company plans. But they do enjoy the freedom to trade individual stocks as they see fit. They are not subject to having someone put their money into one fund or another, often with little choice or variety. |
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