Here’s How To Trade Options In Your IRA
Many of my students’ trading accounts are held in some form of an IRA.
Can they trade options?
Certainly.
But there are some limitations that must be taken into consideration. Let me first say that I am not a CPA and that you should consult your CPA and your broker for any tax related issues with your trading account. That being said, the first thing that you must keep in mind is that there is no ‘current tax” for an IRA. The money is not taxed until the money is distributed and it is then taxed as ordinary income.
So, often times there are no differences between an IRA and a taxable account. For example, a common type of trade that an options trader will employ is the ‘cash secured put”. This is simply the selling of a naked put instead of actually buying the underlying stock. The taxation of gain on any security (including options) that is sold short is at ordinary income rates. So, from an IRA taxation standpoint there is no difference in selling puts and buying stock (though there may well be a difference in investment result).
If you are going to employ any strategy that involves anything other than buying outright calls or puts you will have to establish a “limited” margin account within your IRA to perform the type of strategies we employ in our classroom such as: vertical spreads, calendar spreads and any number of combinations of these. You can’t use an IRA account as a line of credit, as you would with a traditional account.
Many brokerage firms do allow limited margin accounts for IRAs. These accounts allow you to trade on unsettled funds — the money that’s sitting in limbo between trade date and settlement date. Of course, as long as there is no unbounded risk for a given strategy, you can use the cash or cash equivalents in your account.
