Can Company Stock Options Go Into an IRA?

You can invest in company stock options through an IRA, but it is not always a straightforward matter. So, it helps to understand how IRAs work and how you can invest in stock options.

The IRS describes individual retirement arrangements (IRAs) as tax-advantaged savings plans that enable people to save for their retirement. These plans come in two primary forms: Roth IRAs and traditional IRAs. To avoid taxation in the future, it would be best to save for retirement using a Roth IRA since it requires after-tax funds, but the traditional version is a much better option if you want to use pre-tax money and reduce your taxable income now.

Stock brokerages, mutual fund companies, insurance companies, banks and other financial institutions offer IRAs for interested parties. The financial products that these institutions offer will largely affect what you can invest in within an IRA.

That said, you have a lot of freedom about what you can trade within an IRA. Acceptable financial products include company stocks, mutual funds, annuities, bonds and treasury bills. However, your IRA custodian must permit such investments.

In addition, you can use a self-directed IRA. This kind of plan enables you to actively manage your investments and trade in alternative financial products. So, you can invest in real estate, promissory notes, water rights, precious metals, stock options and even cryptocurrency or livestock.

Investor.gov defines options as contracts that enable you to buy (call option) or sell (put option) an underlying asset for a predetermined price (grant or strike price) within a specified period. So, in this case, a stock option refers to a contract to sell or buy stocks as the underlying asset.

Company stock options are an excellent investment if you have a high-risk tolerance. That’s because they can enable you to buy stocks at a discount when the market prices are high or sell them at a profit when the market prices are low. However, you can also lose money if you don’t time your trades carefully.

Generally, you need to have cash handy to purchase the stock options in an IRA. Once the funds are available, you can buy whichever stock options you prefer even if none are available to you via your own company.

If you already own stock options from your employer, you can sell them and contribute the funds to your IRA and purchase your desired options.

Generally, when you exercise your stock options and sell them, if you made a profit, you would need to pay capital gains taxes. According to the IRS, if you hold capital assets for at least a year, you will pay long-term capital gains tax rates, which often average ​15 percent​.

However, if you hold your assets for less than one year, you will be forced to pay short-term capital gains taxes, which are often similar to the highest marginal tax rates. On the other hand, if you make losses, which is more difficult to do with stock options, you can claim capital losses against your taxes to reduce your taxable income.

It may be better to invest in stock options in an IRA, which allows you to defer taxes for years. If you invested in them through a Roth IRA, you will avoid taxes altogether if you take qualified distributions. If you use a traditional IRA, you will pay ordinary tax rates for all your investment earnings at the time of withdrawal.

Your broker or any other financial institution you use as an IRA custodian will determine whether you can exercise various stock options and to what extent. Also, they will factor in your ability to tolerate risk before letting you engage in stock options trading.

Some institutions may require a minimum amount of funds before they permit you to trade in stock options. But typically, self-directed IRAs allow you more leeway in what kind of stock option trading you can engage in.

The IRS has rules on what kind of investment activities are prohibited when investing in stock options. Generally, you cannot buy or sell stock options from or with those that the IRS considers disqualified persons. These include your ancestors, descendants, other family members, beneficiaries, fiduciary, and even yourself. If you do so, your self-directed IRA loses its tax-advantaged status and subjects your funds to current taxation rules.

Remember that you are limited by the annual amount of money you can put into an IRA each year. Currently, that is ​$6,000​ or ​$7,000​ if you are 50 years or older. So, it may not be enough for the kind of stock option trading you want to do.