Do you have an IRA that you would love to use for trading, but aren’t sure whether you can? Trading from an IRA account appeals to some day traders because of the account’s tax-deferral feature. Traders can collect earnings from their trades without having to pay tax on their gains. The taxes are deferred until retirement for traditional IRAs. With Roth IRAs, you don’t pay any tax on your gains.  

So, if you like the idea of making money and saving money at the same time, read on. Discover how to use your IRA account for trading. 

How Often Do You Want to Trade from Your IRA Account? 

If you only trade two or three times per week, you don’t have to worry about special regulations. However, if you trade more than three times over a period of five business days, your broker may label you a pattern day trader.  

If so, according to the rules of the Financial Industry Regulatory Authority (FINA), your brokerage will then have to place certain restrictions on your activities. One mandatory requirement is that you maintain a minimum of $25,000 in your account in order to continue trading. 

Various brokers may have different triggers they use to tell them when they should label you a pattern day trader. So, verify with your brokerage its definition of pattern day trading. And make sure that you’re aware of what penalties it imposes. For example, your broker may institute a minimum equity that’s significantly greater than the minimum $25,000. 

Why You Need to Keep a Close Eye on Your Balance 

At first, the minimum balance may not seem like much of a problem. After all, couldn’t you simply bring your account back up to the required level and continue trading?  

It depends upon the status of your IRA. For example, you may have already reached your maximum contribution limit for the year or you may be past the cutoff period for contributing that year. 

Settled Funds vs Limited Margins

If you’re going to trade with an IRA account, most likely, you’re going to have to use settled funds. You can’t use pending IRA proceeds as collateral in a margin account. 

One way around this is to use a broker that deals with limited margins which may also be called IRA margins. If your IRA rules permit limited margins, you can trade with unsettled funds. Nevertheless, brokers who let you use limited margins may stipulate that you still need to keep a $25,000 balance. 

But trading with unsettled funds means that you don’t have to wait the usual period of time for the funds from a closed trade to settle. You can keep trading. 

Your IRA Account is Not a True Margin Account  

If limited margins or IRA margins were true margin accounts, you would be able to short stocks which you can’t do with a limited margin. Also, when you use unsettled funds, you’re simply using your own money. In contrast, with a traditional margin account, you would be able to borrow and use the broker’s money. You, therefore, have less leverage with an IRA margin. 

Creative Ways to Use Your IRA Margin Account

As mentioned, you can’t short stocks, but if you think an index is due for a downfall, you can take advantage of the situation by purchasing an inverse exchange-traded fund (inverse ETF). You can also purchase put options for individual securities. 

If you need to balance the risk you’re taking, you can also use your IRA to purchase derivatives. Additionally, you can use derivatives to compensate for the leverage you would otherwise miss in an IRA margin account.

You can’t take unmitigated risks so your options will always have to have some sort of protection from loss. You won’t be able to take an unlimited loss, naked positions. 

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