As a young couple scratching together money to build your assets, you may be at a point where your individual retirement arrangements are your biggest chunks of liquid assets. If trading stocks is your next financial venture, those IRA funds could provide money for trading. Unfortunately, while you can occasionally sell and re-buy stocks during the same trading day, the brokerage account rules will keep you from making it a regular practice in an IRA.
IRAs Are Cash Accounts
Stock brokerage accounts come in two basic flavors: cash and margin. A cash account lives up to its name. You can buy stocks up to the amount of cash you have available. A margin account lets you buy more in stocks than you have in your cash balance. The broker will provide a margin loan to cover up to half the cost of stocks you buy. An IRA account will always be a cash account. It is illegal to buy stocks on margin using IRA funds.
Day Trading Restrictions
Buying and selling a stock during a single market day is known as day trading. Selling a stock then buying the same would also qualify as a day trade. If you day trade more than four times in any five-day period and those trades are worth more than 6 percent of the account, your account will be classified as a pattern day trading account. A designated day trading account can only be a margin account, and since your IRA cannot be a margin account, moving in and out of stocks on a daily basis will not be allowed in your IRA. A single or occasional day trade would not set your account up to be classified as pattern day trading.
Freeriding Brokerage Account Cash
Securities and Exchange Commission Regulation T prohibits the practice of "freeriding" or buying and selling a stock with money that is not yours. Since selling stock in your IRA takes three business days to become official or "settle," the money from sold stock is not really yours until three days after you make the trade to sell. Freeriding occurs if you use the unsettled cash to both buy and sell another stock within the three-day window. You will trade with unsettled cash if that the cash balance in your account comes from the recent -- within three days, that is -- sale of stock. So if you sell a stock today and buy the same stock back later today, you would be guilty of freeriding if you sold that stock again within the next three days. You avoid freeriding if there was a previous cash balance that covers the cost of buying the shares.
IRA Trading Alternatives
While a one-time trade of buying back stock you just sold would not cause a problem in your IRA, if you want to actively trade in the stock market using IRA money, you need to be aware of the cash account restrictions. Stick with trading strategies that usually result in holding a stock for three days or longer. You can also add options trading authorization to an IRA. Options on stocks allow you to leverage your cash to earn larger gains if you correctly predict stock price movements.
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