Dollar Cost Averaging TSLA in an IRA

[deonb]

This sounds like something I should have known 15 years ago, but alas I admit I don't...

I've always had a 401k before - on a 401k I would contribute every 2 weeks, and it would buy fractional share at each contribution time - without a per-share fee. So you get a really nice DCA up throughout the year.

How do you do that in an IRA account? You're effectively limited to $105 per week. If I buy let's say 1 share of TSLA every 2 weeks however, I'm going to be increasing my share price by $10 each due to brokerage fees.

I can of course do purchases only once per year, but then it's not really DCA, and you need to actually worry about timing.

Is this just an effect of my brokerage (TD Ameritrade) and I need to find a more IRA friendly broker that do fractional shares at a lower cost? Or are all IRA accounts like that?

 

[Jonathan Hewitt]

The only way you can do fractional shares for IRAs that I have heard of is if your brokerage has a dividend reinvestment plan (DRIP). TSLA has no dividend so that's off the table.

Based on IRA contribution limits and commissions eating into multiple trades I probably woudn't buy stock more than 4 times per year? If you think about it, the negative effects of $1,000 missing a run up because you are buying in chunks aren't going to kill your returns in the big scheme of things whereas paying up to $10 to buy one share of stock at a time each time you have the money for a share is not going to be good (~5% lost to commissions) .

 

[eloder]

The closest thing would be to invest in an ETF or index fund that has no purchase fees, a very low management/expense fee, and have it heavy on Tesla stock.

I use Ameritrade as well so this option will be available in your IRA, in general. Specific to Tesla though, I'm not sure you'll find any such fund even remotely close to buying heavy into TSLA. A compromise may be to use an ETF/index fund, and transfer into Tesla at opportune times 3-4 times a year.

 

[swaltner]

IRA accounts can be similar to your 401(k). The biggest difference is that your 401(k) account is likely investing in mutual funds and not individual stocks.

My IRA accounts at Vanguard are all investment accounts. This means they can contain cash (invested in a money market fund), mutual funds, and/or individual stocks. Every month on the 9th or the month, I have Vanguard automatically transfer $458.33 ($5,500 spread into 12 monthly purchases) into my IRA account. I invest that directly into VFIAX (S&P 500 Index Fund), which is done buying fractional shares. Last Thursday, I purchased 2.339 shares at $195.96 for that $458.33. On the day of the first Model S f*re, I sold some VFIAX and then the next day purchased TSLA.

As for how you would do this to purchase TSLA on a regular basis, you would likely have your monthly transfer just going into a cash position in your IRA account. From there, you would buy TSLA shares as possible. As Jonathan just said, you probably don't want to be buying TSLA on a monthly basis in your IRA account just because of the large amount of commissions you would be paying. Vanguards fees are listed at Vanguard - Vanguard Brokerage Services - Commission and fee schedules. Worst cast, at the current stock price of $217.87, you would buy 2 shares every month and about once a year, you'd have enough cash to get 3 shares. The commission rate for small accounts is $7 per trade, which would be 1.6% added onto the purchase. If you had $500,000 invested with Vanguard, their fees drop to $2/trade, which is only 0.5% of this hypothetical purchase.

If you want to move your IRA account to a company that would have lower commission rates, that investment company would be happy to help you transfer your IRA assets from Ameritrade over to them. If you do an IRA Rollover, there would be no tax consequences for the transfer. I personally like Vanguard, but other options are available.

Since you mention investing in your 401(k), but didn't say if you were investing in stocks or mutual funds, one potential word of caution. I would never purchase the stock of the company I work for in my 401(k) or IRA account, no matter what the company was. Companies like Enron are the reason I think you should avoid your company stock in your 401(k). If you own your company stock in your 401(k)/IRA, you are gambling your CURRENT and FUTURE financial well being on the health of the company. In the even of a company bankruptcy, you would lose your job (CURRENT) and retirement account (FUTURE) at the same time. To make this problem even worse, people tended to blow way past the suggested 10% max of your net worth in any single company. This was easy to do with 401(k) investing, ESPP, RSU, stock options, and the like. There are many ways for an employee to build up company stock over the years. In some cases, your 401(k) match is done as company stock. In that case, I'd transfer the value from company stock to mutual funds as soon as the company match had vested and you were able to sell those shares of company stock.

 

[deonb]

My IRA accounts at Vanguard are all investment accounts. This means they can contain cash (invested in a money market fund), mutual funds, and/or individual stocks. Every month on the 9th or the month, I have Vanguard automatically transfer $458.33 ($5,500 spread into 12 monthly purchases) into my IRA account. I invest that directly into VFIAX (S&P 500 Index Fund), which is done buying fractional shares. Last Thursday, I purchased 2.339 shares at $195.96 for that $458.33. On the day of the first Model S f*re, I sold some VFIAX and then the next day purchased TSLA

Ahh yes, that's what I want to do. I kind'a expected they can't purchase fractional TSLA, but fractional index funds are fine. I'm surprised Ameritrade doesn't offer this.

 

[MitchJi]

Hi,

Would occasionaly buying a LEAPS help you accomplish what you want?

 

[ggr]

Ahh yes, that's what I want to do. I kind'a expected they can't purchase fractional TSLA, but fractional index funds are fine. I'm surprised Ameritrade doesn't offer this.

There's no good reason to issue fractional shares except DRIPs (Dividend ReInvestment Programs), and Tesla doesn't issue dividends.