Tax problem with daytrading futures in Roth IRA?

Discussion in 'Taxes and Accounting' started by OrderBlaster, Sep 23, 2005.

  1. Several custodial trust companies allow anyone to open a Roth IRA account and trade futures in it. Here are just two:

    If your income qualifies you to contribute $4,000 into a Roth IRA account this year - what a deal that looks for futures daytraders. Daytrading on margin, tax-free growth and tax-free distribution, forever more. Sign me up says the futures trader!

    But then I've seen articles which kind of say this:

    If you trade 'too much' i.e. make frequent day trades in your futures IRA account, you may run afoul of certain IRS tax code, which says you are engaging in producing business income. And you run the risk of the IRS disqualifying the entire tax-free status of the account. Crudely put, if you buy one futures contract and hold it for three months and it makes $200 profit while you go about your daily job, the IRS will leave you alone. But if you daytrade your $4,000 account aggressively into $500,000 by trading 10 times everyday, they might just find a way to eliminate the tax-free status of your account.

    The key word being "might". It seems like a total grey area. Does anyone have any clarity on this issue? The cynic in me notes the following:

    The guys who might know the most about this subject (GreenTraderTax et al) might have a vested interest in daytrading IRAs being a tax problem. Why? Because if there is no problem to frequently trade futures in an IRA, then the vast majority of people will just trade futures in their Roth IRA. Who cares about trader status, corporate entities (to write-off expenses) if you can trade 100% tax-free and keep your life simple? You can always have a separate regular trading account to write off your expenses anyway.

    So the tax firms most familiar with trader tax laws might actually have a vested interest in scare-mongering about this issue. At least, that's what the cynic in me thinks!

    The way I look at is is this ...if it were possible for futures traders to be taxed (if they trade too freuqently in their IRA) then wouldn't the custodial companies like North Star and Millenium have thought about this? Why would they market these products and act as custodians if there was any chance that their customers could be taxed?

    Thoughts? opinions? tax rulings? ...
  2. sprstpd


    Yes, I have seen people say this several times and nobody has backed it up with evidence to my liking. Good luck in getting answers to your question.
  3. The evidence is found in U.S. statutary law (TITLE 26--Internal Revenue Code) as follows, which your tax attorney can opine on how it might apply to your own situation:

    The UBTI provisions are found at §§511-514. The language of §§511(a)(2)(A) and 501(a) were not conformed to include IRAs when the IRA provisions originally were enacted, but §408(e)(1) clearly indicates that the UBTI provisions apply. See §513(b)(2), defining any trade or business regularly carried on by the trust of a qualified plan to be unrelated to the plan's tax-exempt purpose.
  4. What a grey area hey? Surely someone must know something. I mean, are the people at North Star and Millenium just giving us half of a story?

    Because I don't see anywhere on their web sites that says:

    "Yes, we offer futures in IRAs, but please remember not to trade these accounts too frequently otherwise the IRS might disqualify their tax-free status!".

    I mean, you would think that the trust companies acting as the IRA custodian who offers such accounts, might have researched this issue, right? To them, it's money being able to provide such a service.

    The CPA tax firms by contrast makes more money selling the benefits of trader status and corporate entities than they do in advising you that a simple little Roth IRA could be the greastest thing ever. Then again, maybe it is the trust companies who haven't done their homework and could be inadvertently facilitiating a tax problem for their 'frequent' daytraders. Maybe it's the scare-mongering CPA trader tax firms that are right to flag this issue.

    Who the hell knows?!!!

    But it would be nice to have an expert research this issue. I suspect that it has never come up before. Guess when it will come up? when the first futures trader turns $4,000 in a Roth IRA into millions and then takes a tax-free distribution. The IRS will be all over it. Then we'll get our answer via the court ruling.

    It sure would be nice to have the answer beforehand. I don't wanna be that guinea pig :D
  5. TraderStatus - are you saying that trading futures freuquently would be a problem or not? If North Star offers a custodial plan to trade futures then trading futures for retirement purposes, is that plan's purpose. Surely there can be no question that trading futures in an IRA is legal and legimate, otherwise companies like North Star and Millenium are openly breaking the law.

    So I missed what you were saying. Are you saying that your interpretation of certain tax laws means that I can trade my Roth IRA futures account once a week, but not 10 times a day?

    Please elaborate.
  6. I don't get it. I looked at those tax laws and couldn't see anything relevant. What the heck do the laws around "unrelated business income" have to to with daytrading futures or stocks in an IRA account?

    I would think that trading/investing for retirement (regardless of how active you are) actually quite "related" to the purpose of the account.

    Where on earth is the link between trading frequently and unrelated business income. How are the two concepts linked together? And if there is some bizarre link, do the people making such a link believe that Millenium and North Star trust companies are advertising potential tax problems for their clients?

    I don't get it :confused:

    About two thirds of the way down is written:

    "This raises an important question of great concern to many traders. Will the IRS consider day or swing trading in an IRA account a camouflaged ?profit-producing? activity that is subject to UBTI?"

    But no clear answer is given. So is this a genuine grey area in the tax law be concerned about, or is it just scare-mongering? I mean, how can trading activity be considered "profit producing" if the money is inside an IRA account and not accessible without penalty? Since when does actively trading equate to the concept of UBTI? And if there is such a link, then who gets to define the parameters. If I trade 10 times a day that a profit producing UBTI activity, whereas only once a day is not? Suppose I trade 10 times today and 1 time tomorrow. Does I owe UBTI tax from the day I traded 10 times, but not the day I traded one time?

    But let's go with the theory (which looks dubious to me) that frequent daytrading in an IRA could cause a problem. How about this scenario:

    Suppose I don't even trade the the futures IRA account myself. Suppose I fill in a power of attorney with the futures broker to have my old high-school buddy Fred trade it He's the guy doing all the buying and selling. Not me. I'm not personally dealing in anything. So even if active daytrading is taking place, it's not being done by me. It wasn't me making the money and I never paid Fred a penny for his services. He is just a kind friend of mine. Is there an IRS camera filming the guy who is actually clicking the mouse to buy/sell?! The paperwork says it was Fred when the account was opened so it must have been Fred. All futures trading profits would have been 100% passive to me personally.

    Then what?
  8. i dont believe it and until i hear of some actual cases where the irs actually made a ruling i wouldnt worry about it. until then the roth ira is the ultimate trading vehicle.

  9. Brokerages are not US Income tax advsors. Further, the advertising by Brokerages is governed by the SEC, not the IRS. It would not necessarily be appropriate for a brokerage to discuss individuals tax "problems" as you call it.

    What you are calling a tax problem, other people might think of as just routine. IRS tax form 990-T (the applicable tax form for UBTI) might be considered no more of a "problem" than is IRS tax form 1040.
  10. thats bull crap. i use green and company for my regualr trading taxes. i'd say 100% it means if your only job is daytrading your ira for income that you withdraw in regular increments then yes you could have a problem. but if you ahve a regualr job or day trade a regular account for a living then never a problem. the irs never see's how many trades you amke in an ira they jsut get the balance every year. for gods sake they don't even ask for options records so why would they care about this
    #10     Sep 23, 2005