Can You Margin an IRA?

by Lisa Bigelow

The Individual Retirement Account is a tax-advantaged investment account that allows people to defer taxes on gains until after age 59 1/2, when they may begin withdrawing money without penalty. The idea behind the IRA is that the investor will be in a lower income-tax bracket when they begin withdrawing funds. While there are several strategies investors can use to maximize their gains, margin in its traditionally understood form is not one of them.

Understanding Margin

Margin is way for investors to rapidly increase their gains by borrowing money. Using the account as collateral, the investor borrows against it to invest more. When the investor makes a winning bet, the account can earn as much as twice the gain; however, when stock purchased on margin declines in value, the borrower must make payments on the amount borrowed. This payment is called a "margin call." Because margin is a form of borrowing, tax law states that it's a form of withdrawal. As a result, margining an IRA is not permitted.

Use of Proceeds

There is an exception to the rule. If an investor sells a stock in his IRA and then immediately uses the proceeds to purchase another stock, it's technically a margin purchase because the first trade hasn't yet settled. The "T + 3" rule states that the investor must wait for three business days past the trade date before the funds become available. However, because the investor is putting the funds back into the market before the trade settles, it's considered a loan -- hence, margin.

An IRA Loophole

If the investor needs to borrow funds but is unwilling to pay the 10 percent penalty that the IRS levies for early withdrawal -- in addition to getting taxed at the current rate -- she may remove the money from the IRA but then repay it in full within 60 days. If she is able to do this, she will have borrowed the money without penalty. However, it's risky; if she is unable to repay the funds within 60 days, then she'll be taxed for the full distribution.

IRA Contribution Limits

In 2011, an investor who is younger than age 50 can put up to $5,000 in a traditional or Roth IRA. If you're older than 50, you can save up to $6,000. These contributions are tax-deductible. Traditional IRA withdrawals get taxed when they're withdrawn, while Roth IRAs are taxed when they're invested. You may be eligible to convert a traditional IRA to a Roth IRA. However, consulting both a professional tax advisor and investment counselor is wise.

About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.

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