Can an IRA Use Margin?

by Leslie McClintock

Many investors choose to put money into individual retirement arrangements, or IRAs, because they combine the tax advantages of a 401k with much of the flexibility and control of a taxable investment account. IRAs generally offer a much greater menu of investment options to choose from compared to a 401k or 403b plan. But there are still certain restrictions. The bottom line, however, is that you cannot open a margin account within an IRA account.

What is a Margin Account?

Some investors attempt to boost potential returns by borrowing from a broker while securing the loan with the securities in their brokerage account. Investors can use the loan for any purpose, but when the proceeds are reinvested in the same securities as in the investor's brokerage account, any gains are magnified; but so are any losses. Meanwhile, if the market is flat, you still have to pay interest on the loan. Margin borrowing is only appropriate for the more risk tolerant investor.

IRAs and Borrowing

The IRS prohibits borrowing from your IRA, or using the IRA as security for a loan. If you do so, the IRS will disallow the IRA, and deem you to have taken a distribution in the full amount of the IRA account. This means you will lose the benefit of tax deferral, and you will have to pay income tax, as well as a 10 percent penalty if you are under age 59 1/2.

IRAs and Prohibited Transactions

In addition to the prohibition on borrowing from your own IRA,or using the IRA as collateral for a loan, you also cannot lend money to immediate family members, nor use the IRA to purchase assets from yourself. You also cannot use an IRA to purchase alcoholic beverages, collectibles or precious metals.

Alternatives to Using an IRA for Borrowing

If you want to borrow, you may be able to borrow against other assets, such as home equity, taxable accounts, land or other real estate assets. You may also be able to borrow against the cash surrender value of a permanent life insurance policy. In each of these cases, you may be able to use the loan proceeds to accomplish the same thing you would have had you opened a margin account, without disallowing the IRA.

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