Tax-favored retirement accounts like IRAs can be useful in saving for long-term financial goals. However, IRAs have regulatory restrictions that prevent you from using them in the same way that you can use a regular taxable account. In particular, the use of margin in IRAs is tightly restricted, and only a certain type of limited margin is available for IRA investors. Below, we'll go into more detail about why IRAs make it tough to trade on margin.
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What margin is and why IRAs don't like it
Margin accounts are readily available in regular taxable accounts, and in fact, brokers tend to encourage them over stodgier cash-only accounts. Margin accounts allow you to borrow against the value of stocks and other investment securities in your account, and you can use borrowed cash for personal purposes or to make additional investments. Margin is a useful tool for those seeking to make leveraged investments with limited capital.
The problem with margin in IRAs is that the rules that give IRAs their tax advantages don't allow you to pledge the assets of your retirement account as collateral for a loan. Because using investment assets as collateral is the basis of the typical margin relationship, traditional margin accounts can't be IRAs. Trying to use IRA assets as collateral can put the tax-exempt status of your entire retirement account at risk, so it's typically not worth it to try to stretch the rules.
IRA investors can sometimes take advantage of a limited form of margin from their brokers. Technically, using a cash account prevents you from making trades until the funds from previous trades settle. This can create lag times of several days in some circumstances, and failing to respect the rules governing settlement times can produce good-faith violations.
In order to prevent these situations from arising, some brokers will let you make trades even when past trades haven't yet settled. To qualify for this treatment, you typically have to meet minimum balance requirements of as much as $25,000. You won't be able to get leverage on your IRA money, but you'll at least avoid some annoying trip-ups if you trade frequently.
IRA investors are often disappointed that they can't get the same access to margin that they enjoy in their regular taxable accounts. Because of the importance of being prudent with retirement savings, however, the discipline that stems from not having margin access in an IRA can sometimes save investors from their own worst mistakes.
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