Buying shares of Tesla (TSLA 0.27%) in your Roth IRA (individual retirement account) may sound appealing after the company announced intentions to pursue another stock split. The company's stock price is currently dancing around $1,000, which can make a whole share unaffordable for some investors. A stock split would make the shares more accessible for the average investor.
Although the stock split is still up in the air, you can still do your research now to see if buying shares makes sense for your Roth IRA. Don't forget to think about diversification, because you don't want to run the risk of having most of your money in one position.
How Tesla works in a Roth IRA
If you want to shop for shares of Tesla in your Roth IRA, you should be aware of how it all works. The Roth IRA is a tax-advantaged account, so there are limits to your shopping spree.
For 2022, you can only contribute $6,000 to a Roth IRA if you are under 50. But if you are 50 or over, you can stash away $7,000 in your Roth IRA. Although the Roth IRA rewards you with tax-free benefits during retirement, the contribution limits can put a cap on how many shares of Tesla you can purchase.
Before you contribute money to a Roth IRA, you'll want to make sure you qualify. Your modified adjusted gross income (MAGI) could stand in the way of your eligibility. If you make too much money, you won't qualify to make direct contributions to a Roth IRA.
Will Tesla overpower your Roth IRA?
Let's say shares of Tesla stock are trading around $1,000 per share. If you only have $6,000 in your Roth IRA, a whole share of Tesla would make up over 16% of your portfolio. This could interfere with your diversification goals. A well-diversified portfolio of assets is ideal if you want to reduce your portfolio risk.
But if you're bullish on Tesla's future, you can still get shares of Tesla in your Roth IRA without exposing yourself to a lot of risk. That's possible through fractional shares. Instead of purchasing a whole share of Tesla for $1,000, you can choose to buy 1/5 of a share for $200 without screwing up your diversification goals.
You could be next in line for a stock split
Tesla made headlines last month when the company submitted Form 8-K to the U.S. Securities and Exchange Commission (SEC). This gave the public an official heads up that Tesla is seeking shareholder approval for a stock split. If approved, this would be Tesla's second stock split since August 2020.
Tesla hasn't disclosed any details about the potential stock split ratio or exact timing. But let's shake a crystal ball and imagine another 5-for-1 stock split. Your 1/5 share of Tesla would transform into a whole share of Tesla on the day of the stock split. Every shareholder would be given four additional shares for every whole share of Tesla stock they own.
The stock split in itself won't cause your Roth IRA balance to explode. It's more of a cosmetic change that breaks up one share of stock into bite-sized pieces. If shares of Tesla are trading at $1,000, the share price would be reset to $200 after a 5-for-1 stock split.
Although a stock split may seem exciting, you should turn your attention to the underlying business. Here are a few items to consider before adding shares of Tesla to your Roth IRA:
- Production capabilities.
- Growth initiatives.
- Supply chain constraints.
- Free cash flow projections.
- Competitive advantage.
Benefits of Tesla in a Roth IRA
If Tesla continues its impressive growth streak, you could end up with one happy Roth IRA balance. On top of that, all your earnings can be 100% tax-free after you turn 59 1/2 and have met the requirements of the five-year rule. That's a deal that's hard to beat.
But as alluring as all the benefits sound, don't turn a blind eye to the cons. The Roth IRA has limits, and you may not be able to buy as many shares of Tesla as you want. That's when a taxable brokerage account or other retirement vehicles can come in handy. The Roth IRA doesn't have to be your only wealth-building account on your journey.
So, do your research and invest in high-quality assets that you understand. Whether that means buying Tesla or another well-known company, your Roth IRA could be an option for you to house those assets. Just don't dive too deep into one stock that you neglect your diversification goals.