The main benefit of trading using your individual retirement account, or IRA, is that your gains do not have to be reported on your taxes. On the other hand, IRA brokerage accounts have restrictions against the use of strategies and tactics that many traders use to boost profits. Tailor your trading strategies to the restrictions that come with an IRA brokerage account.
Cash Account Rules
A cash account, as the name implies, requires you to pay for all trades using your own cash. A margin account allows you to borrow money from your firm, in the form of a margin loan, to purchase additional securities. Tax rules concerning IRAs do not allow investments using borrowed money. As a result, an IRA brokerage account must be a cash account, not a margin account.
Some stock trading strategies require the leverage provided by a margin account to generate acceptable profits. Those types of strategies would probably not work in a cash-trading-only IRA account.
No Selling Short
Traders profit from falling stocks by selling stocks short and buying them back at a lower price; this is called selling short. Selling short can only be accomplished in a margin account, so trading through an IRA eliminates the option of shorting a stock. Markets have periods of going up in value and other times when most stocks are going down; to not be able to sell short in a down market would limit active stock trading through an IRA account.
No Free Riding
A stock trade takes three business days to become official, or "settle." When you sell stock, the cash is not officially in your account until the settlement date three days later. You can buy stock with unsettled cash, but if you sell that stock before the original trade settles, you are guilty of violating the Federal Reserve Board's Regulation T, commonly called free riding, on the cash that is not yet yours.
Free riding is not allowed in cash or IRA accounts. The result of the free riding rule is that you cannot effectively trade short-term – less than three-day holding period – in an IRA account.
No Day Trading
A regular strategy of day trading – buying and selling a stock during the same market day – can only be accomplished in a brokerage account designated as a pattern day trading account. A pattern day trader account works under a different set of margin rules than a regular brokerage account. A day trading account must be a margin account, and since an IRA cannot be a margin account, no day trading is allowed in your IRA.
Think About Stock Options
The cash account classification without the leverage from a margin account makes it difficult to successfully trade stock shares in an IRA. However, IRA accounts can be approved for the trading of stock options. Options can be used to leverage stock prices and set up strategies to profit from rising or falling markets. If you want to use your IRA as an active trading account, options will facilitate that.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.