Long-term investing has a proven track record of success, but many people still prefer to day-trade with short-term investing techniques. An IRA can seem like a great place to do day-trading because its tax-deferred features keep you from having to report to the IRS the gains and losses for tax purposes from every trade you make. However, there are some reasons why an IRA might not work well as a day-trading vehicle.
Regulatory requirementsOne issue that comes up with all accounts is that if you do enough day-trades in a given period, regulators will consider you to be what's known as a pattern day-trader. In that case, you'll be required to keep a minimum of $25,000 in your account.
When you trade in a regular taxable account, that isn't such a burden, because you can always put more money into the account. However, with an IRA, you might not be allowed to add money if your balance falls below the key $25,000 level and you're not eligible to make extra IRA contributions. If that happens, your broker won't let you day-trade any longer.
Settlement and limited marginThe other problem that comes up with IRAs is that you typically can't use a standard margin account for an IRA. That's because IRA rules don't let you pledge assets of the retirement account as collateral for loans, which is the essence of the standard margin relationship. As a result, you always have to trade using settled funds, and that means having an account balance that's far greater than the value of any single day-traded position.
However, some brokers recognize what is sometimes known as limited margin. An IRA that allows for limited margin won't let you borrow against your stocks, but it will let you make trades even when funds haven't yet settled. Using unsettled funds lets you avoid good-faith violations and make day-trades without triggering the pattern day-trader rule. However, some brokers require you to have at least a $25,000 balance to get access to limited margin, so it won't necessarily save you from having a relatively high IRA balance.
Day-trading is a risky business, and using retirement funds to finance day-trading operations isn't something that most investors should do. If you're going to do it in an IRA, it's important to take steps to ensure you don't run afoul of regulatory requirements and other potential pitfalls.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us email@example.com. Thanks -- and Fool on!
The article Can I Day-Trade Using My IRA? originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.