401k for short-duration trading account (tax benefits)?

stockmarketbeginner said:
Where is the math not correct?

Also, apparently you can actively trade in a 401K (unless zacks is wrong):
https://finance.zacks.com/can-invest-401k-day-trading-6562.html

Where the zacks article falls short is that is assumes you need the money right way... you are living off of your day trading. So you would be constantly paying ordinary income tax plus the penalty. The article does consider the case where you actively trade, but do not withdraw for many years.
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The penalty and the ordinary taxes comes when the money is removed from the plan.

What is your response to my main point ? What plan are you referring to ? Who is your employer ?
 
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Robert Morse said:
You are not including paying income tax. Then you are taking a 10% hit with no real expectation you can make more money in a taxable account vs a pension. Then you have to pay taxes every year and have less to trade with than if you allow it to build. Sorry, but unless you need the money for food or school, this is a very bad idea.
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I *am* including the income tax (to emphasize, I put caps lock extra words in to show that the income tax is paid):

Start: 1200
End: 1881
capital gain = 1881 - 1200 = 681
capital gain TAXED AT ORDINARY INCOME TAX RATE OF 25 PERCENT= .25(681) = 170.25
penalty on capital gain = .1(681) = 68.1

Gross - income tax - penalty = net
1881 - 170.25 - 68.1 = 1642.65

I am not seeing where the math is incorrect.
 
penalty is 10% on the total withdrawal(if earlier than 59.5), not on the capital gain. They don't care how much capital gain, the only thing that matters is how much is the distribution.
Listen to Robert, he is the expert.
 
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Robert Morse said:
Don't you also have to pay income tax on the withdrawal? If you take out $50,000 and you are in a 25% tax bracket, don't you have to pay $5000+$12,500= $17,500? That leaves you only $32,500 to trade with. You have to make a 53% return to just get back to $50,000. You should consult your tax specialist. The math does not work.

Bob
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I got it now... thanks! The entire input amount to the 401k has to get taxed. I was taxing only the capital gains portion.
 
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stockmarketbeginner said:
I don't think so. I think you are saying this:
You put $50,000 in and leave it there for 5 years and make nothing. Then you take the money out. You are taxed at 25 and at 10 penalty. So you are left with 32,500. This thinking is incorrect. You didn't earn any income on the 50,000... nothing went "in". I believe you would only be out the 10%, so you would put 50,000 in and end up with 45,000. A straight 10% loss.
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What Robert said is completely correct.
 
stockmarketbeginner said:
I don't think so. I think you are saying this:
You put $50,000 in and leave it there for 5 years and make nothing. Then you take the money out. You are taxed at 25 percent ordinary income tax and at 10 percent penalty. So you are left with 32,500. I believe this reasoning is incorrect. You didn't earn any income on the 50,000... nothing went "in". So there is no "income" to be taxed on. It was just sit-there money. But you would be out the 10% early withdrawal penalty. So you would put 50,000 in and end up with 45,000. A straight 10% loss. That's obviously not the goal. The goal would be something like:
start with 50,000. Snowball over several years to 145,000, enjoying tax-free compounding for many years. Then withdrawal funds and pay 25% income tax + 10% penalty. End up with 94,250 post tax/post penalty.

What I'm getting at is the following: Our tax code a few years back put a tax penalty in for short term trading (taxed as income rather than capital gains). So you do your long-term investments (hold for 1 year or more) in your ordinary brokerage accounts. You do your short term trading in a tax-sheltered 401k account. Keep the hot foods hot, the cold foods cold.

This, of course, assumes you don't need the money from the short-term trading account anytime soon. For me, short term trading is not "I need the money soon so i'm going to make a few quick bucks". Rather, it's "I see an opportunity that develops and concludes in less than one year.".
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You are stating the obvious and not getting the nuances and details that others are trying to point out. I would suggest you re read this entire thread.

The IRS did not change the tax code so that a simple work around would defeat the whole purpose.

One very simple point you have not acknowledged is that most EMPLOYERS ,who administer the bulk of 401k plans , do not allow Short term trading. No matter what your google search/zacks investment web site implies.
 
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