An IRA is an important tool for building your retirement wealth. Whether you choose a traditional or Roth IRA, you probably want to see it grow as quickly as possible. It is no secret that the stock market has incredible upside potential. If you are saving for retirement, ETFs, index funds and mutual funds are IRA-friendly, but what about short selling, day trading and options? With people making a killing short selling, it's a question many short- and long-term investors have.
Short Selling and IRAs
Short selling stocks and other securities is when you sell a security that you do not own. If you think that the price of a security will go down, you can borrow the shares and sell these borrowed shares to investors who are willing to pay the current market price. You then buy them at a lower price and return them to your lender later.
Can I short sell in an IRA account? The short answer is no because the rules for short selling conflict with the IRA account rules set by the IRS.
To short sell, you must have a margin account, but the IRS considers margin trading as a taxable distribution. You will pay taxes and penalties, even if you do not take the money out of the account. Another thing you cannot do is use your IRA as collateral for a loan.
Options Trading and IRAs
Can you sell options in an IRA account? The answer to this question is not as clear as with short selling. You can trade options in your IRA, but only if you have an appropriate level of options trading in the IRA.
You can use advanced trading strategies like a protective put or covered call, or use a collar position. The casual investor might be better suited to traditional investments like bonds, index funds and mutual funds as an IRA strategy for better guarantees on your returns.
One thing you are not allowed to do with your IRA is to sell an option naked. Selling naked means that you must sell an option that is not covered by another asset. This is another risky strategy that could jeopardize your fund, and the IRS rules are designed to help protect your golden years.
Day Trading and IRAs
Index funds, ETS and mutual funds are IRA investments that are a safe bet for many investors, but you might be wondering: can you day trade in an IRA account? If you make four or more day trades in a five-day period, you are considered a day trader. Once you meet this qualification, you must establish and maintain a minimum of $25,000 in your account.
You are not allowed to day trade in your IRA account, but some brokerage firms have established special limited-margin IRA accounts that allow you to get around these rules. You are not actually trading on margin in these accounts, but you are trading on unsettled funds.
In summary, the things that you cannot do with your IRA are to borrow money on margin with it, short sell stocks or sell naked options. As a matter of financial fitness, if you are thinking about using your IRA to fund risky investing strategies, then you may want to reconsider your approach. Before you dip into these advanced trading strategies, you may want to have a separate amount set aside that you are not afraid to lose and that would not jeopardize your future if it were to suddenly evaporate into thin air, and you must follow the rules.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.