Very few people are aware that they can actively manage their investments in their IRA and can actually even day trade in them! The benefit to doing so is obvious: you can maximize your returns while still enjoying the benefits of tax-deferred saving and tax-free profits.
However, there are some limits to active trading within your IRA, particularly when it comes to day trading.
Traditional and ROTH IRAs
Traditional and ROTH IRAs are by far the most popular retirement accounts but there is one major difference between the two and that is how they are funded.
With Traditional IRAs you fund them with pre-tax dollars which means you can deduct your contributions at the end of the year on your taxes but when you start to take distributions during retirement, you will be taxed at your ordinary income level.
With a ROTH IRA you fund the account with post tax dollars. This means you won’t be able to deduct your contributions on your taxes but, and this is my favorite part, when you go to take distributions during retirement, it is TAX FREE.
Meaning all your gains throughout the years will not be taxed a dime!
So why isn’t everyone taking advantage of this? Well, most people aren’t aware they can even day trade in their IRA or that some brokers have what’s called an IRA margin account where you can trade on unsettled funds.
IRA Margin Account
An IRA margin account is a retirement account that allows you to trade on unsettled funds, also known as settlement margin.
So when you place a trade and close it you normally would have to wait T+2 days for the funds to settle before you could trade with them again, but with an IRA margin account you can use those funds right away. This means you can trade more and not have to wait till settlement.
Interactive Brokers is one of the brokers that will allow you to have one of these accounts:
“IB offers a specific form of IRA account referred to as a “Margin IRA” that allows the account holder to trade with unsettled funds, carry American style option spreads and maintain long balances in multiple currency denominations.”
However, just because it is called a margin account doesn’t technically mean you are using margin, they are just allowing you the ability to trade on unsettled funds so you can keep trading.
Another caveat is you aren’t allowed to short stocks even though they are calling it a margin account, but that’s alright because you can still buy put options or trade inverse ETFs.
What Restrictions Are There for Trading In An IRA?
The key restriction for actively trading in your IRA is your ability to use leverage. However, with an IRA margin account you can utilize settlement margin which allows you to trade on unsettled funds as much as you want.
Can I Short?
No, you cannot short securities using your IRA brokerage account. However, you can purchase inverse exchange-traded products or if it has options you can buy puts on them. So there are couple different ways to avoid not being able to short a stock or index.
Can I Trade Derivatives?
Yes, you can trade derivatives in your IRA brokerage account. Most of the rules allow for the buying and selling of vanilla futures and options, but not the writing of naked futures or options.
Can I Write-Off My Trading Losses?
Generally, no, you cannot write-off the trading losses in your IRA brokerage account. The only time that you can do this is when you close out the account.
By far the biggest benefit from trading in your retirement account is the ability to avoid paying taxes on the gains. Taxes on any capital gains in your IRA account will either be deferred in the case of a Traditional IRA or avoided in the case of a Roth IRA where you won’t pay any taxes on gains.
That is huge and why trading in an IRA can be so beneficial. Right now, short-term capital gains is taxed as ordinary income which can be a lot if you are in a higher income bracket.
Actively managing your retirement account is a great way to grow your account while avoiding heavy tax burdens that non-retirement accounts have.
Now, you won’t be able to use the money you make until you reach retirement but the amount you will get to save in taxes will be well worth the wait!
Let us know if you have any questions in the comments below!