People use these boutique firms so they can invest in things a broker like IB will not allow you to do. For example a Private Placement, Oil Drilling and Development, Real Estate Rentals are all quite common. Even "farther out" investments are had for those who desire them.
Tax problem with daytrading futures in Roth IRA?
- Thread starter OrderBlaster
- Start date
There are basically three issues that are being kicked around here in one way or another:
1) prohibited transactions, self-dealing with the IRA. e.g. taking a fee from the IRA
2) trade or business being operated with IRA funds
3) use of margin / debt to get leverage on top of the actual funds available.
Item #1 closes down the IRA retroactive to January 1st in the year the prohibited transaction first occurs. This is a serious event and is generally considered an absolute disaster to the IRA owner.
Items #2 and #3 are considered to be putting an unfair advantage in the hands of the IRA in comparison to fully taxable situations and therefore to even the playing field a tax is assessed against the IRA. This tax is payable on IRS form 990-T annually. This is a common event, and form 990-T is a commonly filed tax form used by tax deferred and tax free entities. Most IRAs are exempt from this because even if they do have some UBTI they do not exceed the $1,000 annual exclusion.
What's your point here? If your trading profit is above $1000/year in a IRA, you owe tax?
Humm, so maybe I should convert my Traditional IRA(IB IRA rolled over from another deferred account) to a Roth IRA. Then trade futures in the new Roth IRA, say positon trading every two to three weeks. The new Roth IRA over the next xx years gains considerably and when 70 1/2 take distributions tax free? In comparsion to the Trad. IRA where the distributions would be taxed.
Do I have that correct?
Do I have that correct?
What does "invest in an entity" mean? Suppose I am a systems trader and I am trading my Roth IRA and a margin account using similar signals. I derive trading profits from the margin account and it is classified as a self proprietor business (so a business in my name). There is no "salary" involved. The only income I receive is when I make a good trade. Would I be deriving income from a business entity outside of the IRA? In other words, I am not investing the IRA in a fund that pays a salary to the person running the fund. It is just my personal account.
Roth IRA is tax-free upon distibutions. Age is 59 1/2 when you can take distributions not 70 1/2. But to roll from a traditional IRA into a Roth IRA, there are two things to note:Quote from PatternMaster:
Humm, so maybe I should convert my Traditional IRA(IB IRA rolled over from another deferred account) to a Roth IRA. Then trade futures in the new Roth IRA, say positon trading every two to three weeks. The new Roth IRA over the next xx years gains considerably and when 70 1/2 take distributions tax free? In comparsion to the Trad. IRA where the distributions would be taxed.
Do I have that correct?
1) You can only make such a rollover in a year where you earn <$100K income (married filing joint)
2) You will pay tax on the gains that are rolled over
In other words you take a tax hit at the time of rollover (assuming you are eligible income-wise to rollover) but then everything is 100% tax-free thereafter. So whether rolling from a traditional to a Roith IRA makes sense will depend on the numbers and the projected returns. There is no right and wrong answer. Clearly the further you are from retirement, the more it might pay to take the initial tax hit to switch to a Roth IRA and go tax-free from that point onwards.
As for only trading futures every few weeks, there is nothing said anywhere that trading them with one frequency vs another is likely to cause a problem. It's been "inferred" but not spelled out. Trading futures does not generate unrelated business income, and if the IRA custodian allows you to trade futures then I can't see what the issue is, regarding frequency of trades.
As to the one guy who asked why would anyone use a trust company (e.g. Millenium & North Star) instead of just using IB for their IRA ...the answers are:
a) IB uses a trust company themselves. They are not the custodian for their IRA accounts. There are fees involved with this arrangement I'm sure.
b) The other trust companies let you choose from a wide variety of different brokers and offer greater flexibility of investements
c) The fees for holding your futures IRA are cheap with North Star and Millenium (check out their web sites)
The way I see it, the Roth IRA is the "ultimate" vehicle for trading futures.
that was just my terms.. an entity meaning anything you could possibly invest money into. a business partnership, real estate etc..
Let's say you decide to start a hedgefund. You can't invest your IRA funds into it, since you get PAID to run THAT fund. In essence you would be receiving your own IRA money w/o paying any withdrawal penalties. But you could invest those funds in someone elses fund. The whole point I think is simple: you can not syphon tax-free money out of your IRA into your pockets via a backdoor.
I came across these paragraphs today and remembered our discussions here. I believe that they are well written and informative. Here they are verbatim, without further commentary from me:
What is UBTI and how is it different from UBIT?
UBTI is an acronym for Unrelated Business Taxable Income. UBTI generally occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest.
UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long term investing, and when it purchases an asset that produces income unrelated to the intent of the âplanâ then that income is subject to taxation â which means your IRA will be paying taxes on profits generated from your business purchase.
UBTI is subject to Unrelated Business Income Tax or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:
$0 - $2,000 = 15%
$2,000 - $4,700 = 25%
$4,700 - $7,150 = 28%
$7,150 - $9,750 = 33%
Over $9,759 = 35%
UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.
UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.
What is UDFI?
UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).
For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and letâs assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA.
As a side note â UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early â it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.
Quotes of the day:
It just isn't worth having your IRA disqualified because your greed is bigger than your brain.
Your IRA is much too important for you to step over the line and violate the governing rules.
What is UBTI and how is it different from UBIT?
UBTI is an acronym for Unrelated Business Taxable Income. UBTI generally occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest.
UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long term investing, and when it purchases an asset that produces income unrelated to the intent of the âplanâ then that income is subject to taxation â which means your IRA will be paying taxes on profits generated from your business purchase.
UBTI is subject to Unrelated Business Income Tax or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:
$0 - $2,000 = 15%
$2,000 - $4,700 = 25%
$4,700 - $7,150 = 28%
$7,150 - $9,750 = 33%
Over $9,759 = 35%
UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.
UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.
What is UDFI?
UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).
For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and letâs assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA.
As a side note â UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early â it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.
Quotes of the day:
It just isn't worth having your IRA disqualified because your greed is bigger than your brain.
Your IRA is much too important for you to step over the line and violate the governing rules.
Traderstatus, I'm not asking for advice just your personal opinion on this question:
With regard to the above quote, how would you classify buying and selling futures contracts inside an IRA? We're not talking stocks here, only futures. Outside the IRA, let's say the person is buying/selling futures in a regular futures account and filing tax returns as an investor using Form 6781 for his futures profits, which means they are being declared as capital gains subject to 60/40 tax treatment.
For such a futures 'investor' who also has an IRA in which he daytrades futures contracts ...are you suggesting that the tax-free status of the IRA might be disqualified? If so, what is your rationale? The purpose of trading in the IRA is for long-term capital appreciation for retirement, so who cares how often a person buys/sells? Futures contracts do not in and of themselves generate income.
You know what ...maybe filing as an investor for regular trading profits (instead of trader status) might guarantee the IRS doesn't think anything odd about the capital gains in your futures IRA. Perhaps it is declaring trader status for regular futures trading that risks geting the profits in your futures IRA seen as UBTI. Maybe those 'investors' are onto a good thing?
There are plenty of people who want to actively trade stocks or futures in their IRA in addition to outside the IRA. But if they file trader status thereby declaring their non-IRA activity to be "income" then perhaps the IRS could say "well then, it's bloody well income inside the IRA too" and disqualify the tax status of the IRA. In other words the IRS might say to the person: "listen Mr. Trader, you can't tell me on the one hand that you sit at your screen all day and are a trader with income doing this for a living ...and then turn around and tell me that the same activity in your IRA account is a long-term investment. You can't have your cake and eat it too."
This appears to be a serious problem. Trader tax firms have been selling the benefit of trader tax status to their active daytrading clients for years. The ability to daytrade in an IRA is fairly recent. If those daytrading clients suddenly start losing the tax-emempt status of their IRAs, and the reason was because they declared themselves to be traders with 'income' outside the IRA ...then the trader tax firms are going to be faced with a mass of very pissed off customers.
What benefit would it be to declare trader status to write off that seminar expense, if a by-product is that the IRS later shreds apart your IRA with tax and penalties? The Trader Tax firms need to get this issue sorted out FAST. In the meantime, "investors" are looking better by the minute with their safe tax-free IRA accounts ...