There are many different types of IRA accounts and while there may be no specific rule against trading stock options in an IRA account, certain types of options strategies may not be conducive to their inherent limitations.
IRA custodians, the organizations responsible for management of the IRA account, may also place limitations on what type of investing can take place. Often it depends on how well the IRA is capitalized, what types of options trading will take place and the investing sophistication of the account holder. For example, if an investor wants to execute a long call option then the funds needed to purchase the stock may exceed the annual IRA contribution limit for the account.
IRA accounts allow investment income and capital gains to be tax deferred up until retirement age at which time the account holder must begin taking distributions from the account. Since an IRA investment account is similar in most respects to a standard investment account the account holder may wish to maximize investment returns by trading in something other than just mutual fund shares. Options trading could lead to significantly higher returns if executed properly which could help the retirement account grow faster but also increasing risk. The problem is that certain types of options strategies may not work well within the limited framework of an IRA account.
The two types of options available for trading are calls and puts. There are a number of different combinations available and strategies for calls and puts such as straddles, strangles, spreads, covered calls and LEAPs. If a wealthy investor owns 10,000 shares of company stock, it would be possible for the account holder to write covered calls against the stock which could result in tax deferred income as well as tax deferred capital gains. Because the account holder owns the required shares to cover the call if it is executed additional funds would not be required which could cause an IRA contribution problem.
If an IRA account holder wants to do more than buy and sell an option it is important to remember the funds need to be the previously available in the account. An account holder would not be able to exercise a call option to purchase shares of a stock if the funds are not available because additional contributions may not be possible if they exceed the annual contribution limit for IRA accounts during the calendar year.
Options transactions are also time sensitive meaning they are worth less the closer they get to expiration. If losses are incurred in an IRA account from trading in options those losses cannot be applied to non-IRA accounts because they are separate entities and treated as such under different rules by tax law.
It is also possible that the organization which is currently the custodian of the IRA account may not allow options trading. It may be necessary for an investor to do research prior to opening an IRA account before moving an IRA account between organizations depending on financial goals and investing style.
Options have significant upside potential because of their leveraged nature but they can also result in significant losses and therefore IRA accounts, while not specifically barred or prohibited, are probably not the best type of account for options trading. IRA accounts are meant for long-term financial goals and should be used to invest in less risky and more stable investment instruments such as certificates of deposit, mutual funds, stocks and bonds.
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