Can an IRA Be a Margin Account?
Individual Retirement Accounts (IRAs) are tax-favored investment structures that must follow the regulations set forth by the IRS. For many investors, IRAs are their largest investment assets. As such it makes sense to want to maximize your investment dollar by setting up an IRA as a margin account.
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Loans
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The IRS is very clear regarding IRA accounts. You are not allowed to take a loan against the IRA funds, use them as collateral or otherwise pledge the asset to obtain a loan.
Margin And Loan
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Margin accounts at brokerage firms loan funds to investors as they attempt to take advantage of specific market conditions. Because a margin account inherently maintains loans, IRAs are not allowed to be structured as margin accounts.
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Consequences
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Should the IRS discover you have used your IRA in a loan structure, the entire amount of the IRA is added to your income. Therefore, if you have a $200,000 IRA but only used $50,000 in a margin scenario, the entire $200,000 is still considered distributed, taxed and penalized if you are younger than the age 59 1/2.
Limitations
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Not being able to maintain a margin IRA account means that investors are not able to sell stock short. This limits one investment strategy many savvy investors utilize.
Loopholes
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Unlike most IRS regulations, there are no loopholes for this scenario as of 2010. The only option is to liquidate the IRA, pay taxes and penalties, and open a margin account with the post-tax funds.
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