Can I Day Trade Using My IRA?

All things being equal, you can day trade in any type of investment account, including in an IRA. However, government and regulatory agencies set parameters around day trading activity in general. These rules and guidelines directly impact your ability to day trade stocks, options and other types of securities, and failure to comply can lead to account restrictions. Because you cannot borrow funds using margin in an IRA, additional special circumstances apply.

The Financial Industry Regulatory Authority (FINRA), considers the purchase and sale of a security in the same day a day trade. Traders who execute four or more day trades in five business days get slapped with the "pattern day trader" designation. This trading activity must account for more than ​6 percent​ of your overall trading activity in that ​five-day​ span.

These definitions apply to IRAs as well as regular taxable accounts. As such, you could make periodic day trades in an IRA, without going over the limit, and face no consequences.

If you become a pattern day trader by executing ​four or more​ day trades in a ​five-business-day​ period, FINRA requires that you establish and maintain a ​$25,000​ minimum balance in your account. You can meet this requirement for day trading in an IRA by using your cash balance, the value of securities you own, or a mix of both.

For instance, if you have a ​$12,500​ cash balance and ​$12,500​ worth of XYZ stock, you meet the minimum requirement. If, however, XYZ stock declines in value and you take no other action to maintain the ​$25,000​ minimum, you violate FINRA's rules.

If you are a day trader and your account balance drops below ​$25,000​ once your brokerage has labeled you a pattern day trader, you will not be able to day trade until you reestablish that minimum balance. You will need to deposit cash, transfer holdings from another account or hope that any securities you hold in your account increase in value to achieve the ​$25,000​ balance and lift the day trading restriction.

If you day trade, you probably do it in a margin account, where you can borrow funds to trade on from your brokerage, using eligible holdings in your account as collateral. This prevents you from committing settlement violations in your account. Generally, you commit a settlement violation when you sell a security prior to paying for it.

In a nutshell, when you purchase a stock, for instance, the funds you used to make that purchase settle ​three days​ after the trade. If you sell that stock before the funds have settled, you have committed a settlement violation known as free-riding. These violations can lead to trading restrictions on your account.

Margin accounts, generally speaking, eliminate most types of settlement violations, but you cannot trade on margin in an IRA. Some brokerages, however, offer special types of IRA accounts to get around that problem. These special limited margin IRA accounts enable day trading in an IRA and avoiding free-riding violations; however, you cannot short or carry a debit balance.

Interactive Brokers, for instance, offers an "IRA margin account." Don't let the name confuse you, as it is misleading. You are not actually borrowing money to trade on margin in this account; rather, the brokerage structures the account in such a way that you can immediately trade on unsettled funds.

This account feature facilitates day trading in an IRA without the need for margin borrowing and without the worry of free-riding violations. It is important to remember that in this type of account you cannot short stocks or do anything else that requires your broker to loan you funds on margin.