IRS Denial of Tax-Deferral Benefits of IRA Accounts

Robert Green wrote in his February 2003 Active Trader article, "A Special K", that if you trade more than 25% of your retirement account assets, the IRS may deny the tax-deferral benefits of the account.

Robert (or anyone else who knows), could you please elaborate on this?

What kind of trading in an IRA account would draw the IRS' attention?

Is there a way we can actively day trade 100% of IRA accounts and not worry about being denied tax-deferral benefits?

I was planning to day trade my IRA accounts in the same manner as my taxable accounts, but I may not if I would lose the tax deferral benefits.

Thanks.

-- ITZ

 

Thanks Robert. I'll drop you a reminder if I don't hear from you.

 

Hi Robert,

Any updates on this topic?

A few more questions for you:

1. Given how 401K's may fall under this rule, would we be better off putting funds in SEP-IRA's instead of the mini-401k's you've been writing about if we are keen to day trade our entire retirement account?

2. What is meant by "25% of your retirement account assets"? Some brokers allow futures trading in IRA accounts, where the notional value of the position can well exceed the value of the account due to leverage. If one buys options for his IRA account, the notional value under control can also exceed the value of the account. In both cases, you can trade less than 25% of your account, but control much much more.

3. Currently many 401K plans allow you to move your funds between different investment vehicles. If I actively move the more than 25% of funds between cash and fully-invested on a regular and frequent basis, am I violating this rule?

4. From an after-tax return perspectively, it seems to me that if your after-tax return from daytrading in a taxable account is higher than the after-tax return of a tax-deferred account that is not actively traded, you'd be better off not making any contributions to the retirement fund at all. What do you think about this?

-- ITZ

 

this other thread

http://www.elitetrader.com/vb/showthread.php?s=&threadid=19307

seem to have concluded that trading is not a problem ...

two earlier thread also discuss this

http://www.elitetrader.com/vb/showthread.php?s=&threadid=13724
http://www.elitetrader.com/vb/showthread.php?s=&threadid=11554

 

Thanks Trader42 for your post.

I looked at the threads you listed quickly.

Perhaps I missed it, but I didn't see any messages that answered my questions in regards to the tax implications of actively trading your retirement funds.

Perhaps you can more specifically answer the questions I had posed in this thread?

Thanks.

-- ITZ

 

Robert,

You asked previously that I drop you a reminder about the status of your research into this issue.

Any new developments?

Thanks.

-- ITZ

 

Bob- I am curious as well.

 

I know some brokers will look the other way, but the broker could get burned for allowing someone to Daytrade their IRA Account.

 

any word on this?

Christine

 

For a detailed info regarding the tax implications of actively trading IRAs, 401K, etc., see

http://snurl.com/2yzg

It's from Robert Green's tax company's web site's discussion board.