Based on searches that lead people to Six Figure Investing, these are the top investment questions people ask about IRAs. For definitive answers to tax questions in your specific circumstances please consult a tax professional.
- Why trade in an IRA? Because it allows you to defer or avoid taxes on dividends and capital gains—all of your profits can be reinvested tax-free.
What trading restrictions/rules are there for IRAs? The only universal restriction is tied to IRS rules that do not allow borrowing from an IRA account. This restriction blocks short selling, leverage using margin, and the sale of naked put or call options. Brokerage firms vary in what they allow, but generally, you can trade all stocks and exchange-traded products (ETFs & ETNs) including leveraged (SSO), inverse (e.g., SH), and volatility funds (e.g., VXX, SVXY, ZIV). Some trades such as options, leveraged/inverse funds, volatility funds, or futures will likely require extra paperwork/qualification.
- What specific restrictions/features do brokers put on their IRA accounts? Data on a few brokers:
- E*TRADE: Futures not supported
- Fidelity: Futures not supported
- Interactive Brokers and TD Ameritrade: Limited margin for avoiding settlement date restrictions
- Schwab: Futures not supported
- Thinkorswim: Looks pretty open, including futures
- Are the trading rules for a Roth IRA different from a Traditional IRA? There are no differences that I’m aware of.
- Can I day trade in my IRA account? Typically there are no pattern day trader restrictions on IRAs that have a value of more than $25,000. However frequent trading in a cash account (typical for IRAs) can lead to violations of the 2-day trade settlement rule. Unless you are only trading a small percentage of your account balance you will quickly run into settlement problems. If you break these rules you will get “free riding” or “good faith” warnings/violations (SEC Regulation T violations) that will cause restrictions to be put on your account. See “Trading in an IRA and avoiding free-riding” for more information.
- Is there an easy way to avoid “free riding” in my IRA account? Only buy when you have enough “settled funds” in your account (usually visible in your online balances) to cover the purchase. Interactive Brokers and TD Ameritrade have limited margin features for avoiding settlement date restrictions—they essentially waive the 2 day settlement period.
Stock/ ETF/ ETN trading
- Can I buy stocks on margin in my IRA? Not if you are trying to get leverage. While some brokers offer IRAs with limited margin, that capability is only there to manage options strategies and avoid cash settlement issues. While there are many leveraged ETPs available these funds are typically daily resetting funds that rebalance at the end of every day to maintain their leverage factor, these will behave differently than creating leverage by borrowing money and buying more of something—specifically path dependency. The value of these leveraged ETPs depends on the patterns of prices whereas a margin leveraged investment does not.
- Can I sell stocks short in an IRA? No, but you can buy inverse Exchange Traded Products (ETPs) like SDS (-2X S&P 500) or SH (-1X S&P 500). With options you can often nearly replicate a short position—by buying puts or call spreads with the short side deep in the money.
- Can I buy leveraged or inverse ETF / ETNs like SSO (2X S&P500) in my IRA? Most brokers allow this. You may have to sign a waiver or be qualified first.
- Can I buy volatility ETNs/ETFs like VXX, UVXY, and TVIX in my IRA? Most brokers allow this. You will probably need to sign a waiver or be qualified first
- Can I use a stop loss order in my IRA account? Yes, but for stocks / ETPs you should wait 2 days after your purchase to put it in place if you used unsettled funds for the purchase. Otherwise, you run the risk of violating the SEC’s free-riding rules if the stop loss triggers. See this post for more information.
- Can I trade options in my IRA account? You need to be qualified and allowed trades vary between brokers, but yes you can—except for selling naked calls or puts—the highest risk category. Calendar Spreads with the short side further out are also prohibited.
- What happens if options in my IRA are assigned? Option assignment can be a problem if it not covered by cash or offset by other positions in your account (e.g., stock in the case of a covered call, or an offsetting assigned option). For example, if the short side of your vertical spread is assigned when the underlying goes ex-dividend your account will go short the equivalent amount of the underlying—not a sustainable situation for an IRA account. You must cover the short quickly, but unless you have sufficient settled cash in your account you may get a “free ride” violation (see Trading in an IRA and avoiding free-riding). A call to your broker if this situation occurs would be a very good idea. It might be possible in this case to wait one day before covering and avoid the violation. Unbalanced option assignment can also happen when the options in a spread expire with one leg in the money and the other OTM. Cash-settled index options (e.g. SPX, VIX) don’t have this problem. See Options strategies in Your IRA Account for more information. Index options are nice because they are usually European style options that can’t be assigned before expiration—totally dodging the problem, however, there may be some restrictions on them when used to create spreads with different expiration dates.
- Can I sell puts in my IRA? You can sell cash secured puts in your IRA if you have approval for that level of options trading from your broker and you have enough cash in your account to buy the requisite amount of the underlying security (100 shares per option) if your puts are assigned. An alternative is to open put spreads where the long leg strike price is well below the short leg. This approach doesn’t tie up as much cash and allows limit orders at the lowest possible increment (e..g, one cent for equities).
- Can I write off a trading loss in my IRA on my taxes? Generally no. Only if you have liquidated the account and your distribution was less than the amount you contributed. Of course, the converse is also true; you don’t have to pay taxes on gains. The IRS always seems to have exceptions so check with your tax advisor if you have questions.
- Will my dividends or capital gains be taxed in my IRA? No, taxes on dividends and capital gains are either deferred (traditional) or avoided (Roth) in an IRA.
- Can I write off commissions on my trades within my IRA? No, the tax exemption cuts both ways. There’s no way to write off expenses like commissions or management fees.
Click here to leave a comment
29 thoughts on “Top 15 Questions about Trading in an IRA”
Is selling naked futures-options different? If the client is a US citizen, accredited/qualified, who claims he heard that it is possible to sell strangles on index futures
You are somewhat incorrect regarding Naked Puts.
TD Ameritrade (ThinkorSwim) allows the following in IRAs:
Tier 2 Options. Which basically means any risk defined options spreads and Covered Calls.
They DO allow Naked Puts (but not naked calls). Note that the capital requirement on a Naked Put is going to be equivalent to the break-even stock price. So there’s no real leverage there. Basically the same capital requirement of a Covered Call.
They also allow Futures trading in an IRA but not Options on Futures. Min requirement to trade Futures in IRA is $25k.
Pattern day trading rules do not apply to Futures Trades.
Regarding “Naked” puts, perhaps this is just a difference in terminology. If you have funds in your account cover the puts, some people would say they are no longer “naked”, but rather “cash secured”.
Am I allowed to trade option credit spreads in my IRA?
Depends on the broker, and they change over time, and on specifics. Fidelity does, Schwab currently only supports non-index options, OptionsXpress doesn’t allow calendar spreads.
Yes -TD Ameritrade allows it.
If you trade options spreads in an IRA, make sure you account for they possibility of early assignment. It could conflict with margin or short restrictions.
Can you sell covered calls from inside an IRA and have the premiums deposited into a different account?
Hi Dennis, I very much doubt it. If it is possible it could count as a taxable withdrawal.
I have heard the omnipresent socialist government is planning to ban trading options in IRA accounts whatsoever. Does anyone know about this?
I talked to someone with deeper knowledge today at TD Ameritrade. The agent told me that they can offer me 50% margin on my IRA account which only applies to funds awaiting settlement. I asked what the interest rate on that money was and they said that there wasn’t any interest to be paid since I actually will not be borrowing money since it is only covering unsettled funds. I have a SEP IRA and he said it works for all types of IRA. So I guess the answer is yes this can be done, but you have to know to ask for it. Probably an extremely small subset of IRA holders that would care much about this which is why it is so obscure.
Hi Roy, Thank you very much for posting the results of your call. It’s useful information. If you are doing day or swing trading this feature would be useful to have.
I called TD Ameritrade and asked them about the T+3 rule and if there was any way around it with IRAs. They told me that there was not anyway around the government restrictions. Am I missing something here?
I’d suggest calling back and asking about their margin accounts for IRAs. You might call their attention to https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD845.pdf Could be you just ran into an unknowledgable support person. Might help to describe the specific trade sequence you have in mind. For example, In my mind there’s a big difference between waiting for the proceeds of a sale in an IRA to become “settled cash” vs trying to purchase something in IRA account that is not funded to that level on the promise that cash is coming.
DISCLAIMER: The following DOES NOT constitute tax or legal advice. Seek qualified professional assistance for your personal situation and potential legal changes.
It MAY BE possible to pay for annual IRA fees with funds OUTSIDE of the account itself (separate check, or whatever) and therefore write off the expense as an INVESTMENT EXPENSE which would apply the same to things you may use for INVESTMENT PURPOSES–a subscription to the Wall Street Journal, Money Magazine, Forbes, some portion of a computer when trading, maybe a portion of your Internet Access. Many things, but seek a CPA or Tax Attorney in such matters.
Using 10-year treasury futures, I’m planning to hedge against rising interest rates for a mortgage while I shop for a house. I’ll be buying out-of-the-money puts to keep down the amount of money tied up. The cost of the 100 contracts would be about $4,000.
I’m looking for a brokerage where I can open an IRA and place an all-in fixed-fee futures trade for a reasonable price. I’m only anticipating two or four trades depending upon how long it takes me to find a house.
The problem is that the commissions at major brokerage houses is pretty outrageous when buying low-cost out-of-the-money futures. E-Trade and TD Ameritrade are $2 to $3/contract times two trades = ~15% commision.
I looked into efutures.com, which charges very reasonable flat-fee futures trades, but for an IRA they require a trustee company which charges $350/year maintenance. I plan to transfer the IRA back to Vanguard after I’m done with this hedge, sometime within the next few months.
Anyone know of an appropriate firm to handle this?
I don’t have any direct experience, but you might try Interactive Brokers or ThinkorSwim to see if they have a better deal.
Thanks. Funny enough, I found Interactive Brokers shortly before your comment! From what I could tell, when I looked at ThinkorSwim, they were just a platform for TD Ameritrade. TD Amertirade’s futures commissions aren’t competitive for large lots.
Wow, after my short-lived experience with Interactive Brokers, I would definitely never consider them again. Had I read what they did to IRA futures options traders a month ago, purposefully shutting off all options trading without notice or explanation for about a week (see below link,) I would never have opened an account with them. Then I got a rude introduction to their seemingly absurd cash-on-hand requirements to purchase options to open, which I believe is a completely risk free purchase other than the risk of the loss of the cost of the contract itself. They wanted me to have $20,000 cash in the account to buy $2,000 worth of puts on the treasury futures to open. The CME told me there is no such exchange requirement that they do this.
I was sad to see that Interactive Brokers no longer allows futures trading in its IRA accounts. A tech rep told me this today, and I found it at their web site: http://ibkb.interactivebrokers.com/node/188
What a shame. The site says that options on futures are not allowed either, though my IB account still has them.
Futures don’t normally have day trading or free riding restrictions in non-IRA accounts.
If I trade with a brokerage that allows an IRA account to trade futures (like TD Ameritrade). Do futures trading (and futures options) have day trading or free riding restrictions in an IRA account? (TD Ameritrade limited margin IRA account)
hi can u buy a stock in my ira and sell it in my personal acct .the stock is currently underwater
My understanding is that only cash can be transferred in or out of an IRA. Otherwise everyone would be doing this…
True. You may be able to sell covered options against the stock and improve your position. I had one go south on me, and that’s my strategy. So far, it’s working to generate income and thus reduce my holding cost on what otherwise has been a bit of a dud. I keep holding because the company is to be broken up and the parts are worth more than the sum. :-/
Hi Vance, are there any wash rules if I’m STRICTLY trading in my IRA account. If I sell a stock at a loss and buy the same stock within 30 days in the same IRA account. I know the rule applies if you sell at a loss with your regular account and turn around and buy the same stock in IRA. And vice versa. But I’m only trading in my IRA in this case. Thanks.
My understanding is that wash rules would not apply within an IRA. I don’t think there is even the notion of basis for standard investments (e.g., stocks/bonds) that are held within an IRA.
Disclaimer: What I’m about to write DOES NOT constitute tax advice and shall not be construed as such. Seek a qualified tax professional regarding the following.
WASH SALE has to do with selling a security at a loss, and then re-purchasing the same security or substantially similar security within 30-days. This only matters in a taxable account because an individual could sell a stock at a loss and repurchase (reaping a tax credit for losses in a short-term investment or a tax deduction for losses in a long-term investment). The IRS looks at that as only a method of “harvesting loss” while substantially attempting to maintain exposure to the investment.
An IRA provides cover or deferment from taxable gains, but also shelters losses from the write-down benefit. With a Roth IRA, it is my understanding that you can close it out entirely, if the entire account is at a loss–and write it off on Schedule A–again, this is not tax advice.
Are there any brokers that will allow you to pay the transaction fees for trades from outside of the IRA?
Hi David, I don’t know of any specific cases where brokers will support this. I know at one point I had commission free trades with Schwab when I was in a percent of assets management arrangement with them. All the fees were paid out of my taxable account.