this discusioion is getting way far out of hand. i had a friend who daytraded his 200k ira for a living back in 1997 before the days of not being able to daytrade ira's. one msut remeber you're hit hard with the 10% penalty and paying full taxation for taking out withdrawels. also you can't write loses off? he ended up losing 1/2 his ira in 18 months. I'D SAY WITHOUT HESITATION IF THE IRS EVER EVVEN LOOKED AT THIS IT WOULD BE FROM SOMEONE SOLEY TRADING THERE IRA AND TAKING SYSTEMATIC WITHDRAWELS OUT OF IT LIKE 4-10 PER YEAR TO LIVE ON. THE ONLY WAY THE IRS WOULD KNOW SOMEBODY WAS USING THERE IRA FOR INCOME GENERATING PURPOSES WOULD BE BY SEEING THE WITHDRAWELS. all the irs gets every year is a total account value from your broker not how many trades one made.. also if you trade in other accounts for your incom,e there would never be a problem no matter how much you traded your ira.
Tax problem with daytrading futures in Roth IRA?
- Thread starter OrderBlaster
- Start date
What you say makes complete sense to me. So I am perplexed why have we got TraderStatus on here (a specialist CPA on trader taxes) flagging this issue? And why is Greentrader, another trader tax specialist, flagging this issue on one of their web pages? That is what concerns me! Failing a clear answer from either of these specialists, I am speculating that it might have something to do with declaring trader status outside the IRA. It's bizarre how these specialists can't/won't explain their concerns ...
it reminds me of when i first used green to do my taxes in 1999. all were scaring me i'd be audited for doing 1 billion in sales and having a 1600 page 1099. enver a problem. i've asked green about the ira issuer years ago. he him hawed around. mjsut like what defines a full time trader? greens told me at least 3 trades a day and it has to be a very substantial portion of your income and you can't have another job. many others will say you can have a job. millions of people day trade there ira. now i suppose if you daytraded it full time and took withdrawels every month they could challange it. what about the guy who works at ibm and trades his ira 15 times a week at work on the net. to say they could disallow him is insane. the irs would open up a can of worms. also as i said oustise taking many withdrawels how could the irs ever keep tabs on how manby times people trade there account. i have an ib roth and trade it at least 5-10 times a week with options and futures. didn't ib jsut change there ira so now you can day trade it and ahve instant access to the funds with no 3 day wait? that sure don';t sound like one can't daytrade it. remember accounatns like fear and chaos as it brings them businmess
This is exactly what I'm beginning to think this is all about. The trader tax specialists are the ones saying that daytrading your IRA might be a problem - nobody else. Yet none of them have indicated any case precedent to back up their concerns. Seems to me that their concern stems not so much as from potential IRS issues, as it does their own needs to scare people away from IRA trading. These specialists help people reduce tax via trader status, entities etc. But such help can't come close to the Roth IRA which totally eliminates tax altogether.
If IRAs can be daytraded tax-free (Roth) or tax-deferred (Traditional), then people will gravitate towards primarily trading their IRAs for retirement. In which case who needs to bother with setting up businesses with a company pension plan, solo 401k plan etc.? i.e all the stuff they make money pitching. If the IRA can be daytraded tax-free without any problem, demand for these other products might fall.
Maybe that's what this scare-mongering is really all about ....?
One way to look at it is from a risk-reward standpoint. What is the potential gain from daytrading your IRA vs the potential cost if you were audited and forced to pay penalties? Also take into consideration the probability of the "negative" event.
I have never heard of anyone getting "busted" by the IRS for running a trading business out of their IRA, and I don't see any unambiguous wording saying that it is forbidden. So my impression is that the probability of it actually being illegal AND getting audited AND being convicted is extremely low. I don't know what the cost might be if you were caught, but suppose you had to pay tax on all the money in your IRA and a 20% penalty. No, that wouldn't be fun but it probably wouldn't knock you out of the game. If you were a successful trader, it would only take a few years of compounding your gains tax-free until it would pay for the worst-case scenario anyway. You could daytrade your IRA, get audited, and pay dearly, but you could also be long the e-mini's on some sunny afternooon when terrorists decide to vent their frustrations by nuking a few major cities.
There may indeed be some risk, but we get to enjoy that whenever we have a trade on...
I have never heard of anyone getting "busted" by the IRS for running a trading business out of their IRA, and I don't see any unambiguous wording saying that it is forbidden. So my impression is that the probability of it actually being illegal AND getting audited AND being convicted is extremely low. I don't know what the cost might be if you were caught, but suppose you had to pay tax on all the money in your IRA and a 20% penalty. No, that wouldn't be fun but it probably wouldn't knock you out of the game. If you were a successful trader, it would only take a few years of compounding your gains tax-free until it would pay for the worst-case scenario anyway. You could daytrade your IRA, get audited, and pay dearly, but you could also be long the e-mini's on some sunny afternooon when terrorists decide to vent their frustrations by nuking a few major cities.
There may indeed be some risk, but we get to enjoy that whenever we have a trade on...
Just a few thoughts.
The vast majority of traders fail to make money as I understand it. Upwards of 80-90%. So it seems fairly unlikely just on this basis alone that the IRS is going to have many "test cases" for trading futures in an IRA! Let alone situations where someone starts with $4K and makes a few millions off it.
Next, there are income limitations to the Roth IRA. Therefore, it would seem that the most likely traders to make "millions" in a Roth IRA are also the least likely to qualify to have one.
But to take it a step further, whether doing futures in a regular IRA makes sense would need to be penciled out. Here's what I mean: futures already have a tax preference. 60% of the gain is long term. Now assume you do futures in a regular IRA. When you take the money out, it comes out a regular income tax rates. In other words, you lose the preference of long term gains. What you gain is the deferred nature of taxation. Whether that makes up the difference would need to be penciled out.
But let's assume for a second that you're one of those traders who didn't make all that much money, so you could do a Roth IRA. Yet you possess the trading skills to make "millions" out of a few thousand, and you were just waiting for the Roth to show everyone what you can do. LOL! What you are being told is that this is a GRAY AREA.
For some reason GRAY AREA appears to be something that a few of you don't understand. What GRAY AREA means is that it was so ill-defined in the law that the tax experts aren't exactly sure how it will be interpreted when and if there are any test cases.
GRAY AREA typically also means that each test case is based on the SPECIFIC DETAILS of each situation. DETAILS become extremely important. I highly doubt that the tax experts are trying to create "fear and chaos" to keep anyone from trading in an IRA. The tax experts may just possess enough knowledge of various nuances that they are worried about how an audit would come down. This in the end is all they can tell you, along with what the consequences would be if you lost. It's up to you to make the decision.
Unlike the prior poster, I would be concerned about the consequences. Let's assume for instance that you do in fact make "millions", spread over a couple of decades. Try figuring out the taxes owed each year, with penalties EACH YEAR, compounding on you over a couple of decades. I would suggest that this could be something that would wipe you out.
I have no vested interest one way or the other. I am not qualified for a Roth IRA. So I don't have one. But I would suggest to all of you that you need to seek out some expert advice. If you can't afford a few hundred to get the advice, then you have to question what you're doing. You sure as hell aren't going to get it on a message board.
Finally, if you think that brokerage firms know all the answers here, think again. Brokerage firms have offered all kinds of tax advantaged investments in the past, some of which ended up being disastrous for their clients. If you're one who thinks they cuoldn't possibly offer something that wasn't right, take that hook out of your mouth. Not only could they, they have.
One final piece of advice. If you're truly good enough to take a few thousand, and build it into a few million, the taxes aren't going to make a damn bit of difference. Trust me on that one.
OldTrader
The vast majority of traders fail to make money as I understand it. Upwards of 80-90%. So it seems fairly unlikely just on this basis alone that the IRS is going to have many "test cases" for trading futures in an IRA! Let alone situations where someone starts with $4K and makes a few millions off it.
Next, there are income limitations to the Roth IRA. Therefore, it would seem that the most likely traders to make "millions" in a Roth IRA are also the least likely to qualify to have one.
But to take it a step further, whether doing futures in a regular IRA makes sense would need to be penciled out. Here's what I mean: futures already have a tax preference. 60% of the gain is long term. Now assume you do futures in a regular IRA. When you take the money out, it comes out a regular income tax rates. In other words, you lose the preference of long term gains. What you gain is the deferred nature of taxation. Whether that makes up the difference would need to be penciled out.
But let's assume for a second that you're one of those traders who didn't make all that much money, so you could do a Roth IRA. Yet you possess the trading skills to make "millions" out of a few thousand, and you were just waiting for the Roth to show everyone what you can do. LOL! What you are being told is that this is a GRAY AREA.
For some reason GRAY AREA appears to be something that a few of you don't understand. What GRAY AREA means is that it was so ill-defined in the law that the tax experts aren't exactly sure how it will be interpreted when and if there are any test cases.
GRAY AREA typically also means that each test case is based on the SPECIFIC DETAILS of each situation. DETAILS become extremely important. I highly doubt that the tax experts are trying to create "fear and chaos" to keep anyone from trading in an IRA. The tax experts may just possess enough knowledge of various nuances that they are worried about how an audit would come down. This in the end is all they can tell you, along with what the consequences would be if you lost. It's up to you to make the decision.
Unlike the prior poster, I would be concerned about the consequences. Let's assume for instance that you do in fact make "millions", spread over a couple of decades. Try figuring out the taxes owed each year, with penalties EACH YEAR, compounding on you over a couple of decades. I would suggest that this could be something that would wipe you out.
I have no vested interest one way or the other. I am not qualified for a Roth IRA. So I don't have one. But I would suggest to all of you that you need to seek out some expert advice. If you can't afford a few hundred to get the advice, then you have to question what you're doing. You sure as hell aren't going to get it on a message board.
Finally, if you think that brokerage firms know all the answers here, think again. Brokerage firms have offered all kinds of tax advantaged investments in the past, some of which ended up being disastrous for their clients. If you're one who thinks they cuoldn't possibly offer something that wasn't right, take that hook out of your mouth. Not only could they, they have.
One final piece of advice. If you're truly good enough to take a few thousand, and build it into a few million, the taxes aren't going to make a damn bit of difference. Trust me on that one.
OldTrader
vhehn,
I know what you mean...but it is a big investment of time to find out the hard way!
I know what you mean...but it is a big investment of time to find out the hard way!
You want it in writing then:
this should help you- a link to Jones Day, law firm with 2200 lawyers in 30 countries. Here's the link:
http://www.jonesday.com/Home.aspx
Vhehn, did you ever hear the expression "pay me now or pay me later" in regard to changing your oil? Paying for oil changes or paying when the rod goes through the side of the block.
If you disregard what I'm telling you and you fall into this black hole, remember you're supposed to be paying estimated taxes quarterly on all that profit you didn't pay taxes on which will eventually be disallowed.
The Roth is NOT for day traders. I'm afraid you'll learn the hard way and man is it rough!
this should help you- a link to Jones Day, law firm with 2200 lawyers in 30 countries. Here's the link:
http://www.jonesday.com/Home.aspx
Vhehn, did you ever hear the expression "pay me now or pay me later" in regard to changing your oil? Paying for oil changes or paying when the rod goes through the side of the block.
If you disregard what I'm telling you and you fall into this black hole, remember you're supposed to be paying estimated taxes quarterly on all that profit you didn't pay taxes on which will eventually be disallowed.
The Roth is NOT for day traders. I'm afraid you'll learn the hard way and man is it rough!