How to more actively trade in your IRA account
IRAs are considered cash accounts and are subject to the regulatory requirements for cash accounts, a 90 day restriction, or a good-faith violation. By considering the use of our limited margin offering in your IRA account, you can more readily avoid these types of restrictions and violations.
What is a good-faith violation?
A GFV is issued when a position is opened using unsettled funds and then the position is subsequently closed before the funds used to make the opening trade have settled. For reference, the current settlement period on a stock trade is trade date plus two business days (T+2), and the settlement period on an options trade is the trade date plus one business day (T+1).
If you are issued a GFV, it will remain on that account for a 12-month rolling period. If an account is issued its third GFV within a 12-month rolling period, then the account will be restricted to settled-cash status for 90 days from the due date of the third GFV. This means you will be required to have settled cash in that account before placing an opening trade for 90 days.
Here’s an example of how a GFV works:
On Monday, February 2, a customer sells 100 settled shares of ABC, which generates proceeds of $5,000. This trade will settle on T+2, which is Wednesday, February 4. He then uses the funds to purchase shares of XYZ on the same day.
On Tuesday, February 3, the customer sells the shares of XYZ. Because the shares of XYZ were bought and then sold using unsettled funds from the ABC sale, a GFV is issued. To avoid a GFV, the customer would need to hold the XYZ shares until Wednesday, February 4 (when the sale of ABC settles), before selling them.
What is limited margin in an IRA and how can it help?
Limited margin is a feature you can apply for in your E*TRADE from Morgan Stanley IRA account that may enable certain benefits of margin accounts.
Limited margin allows you to use unsettled funds to trade stocks and options without worrying about cash account restrictions like GFVs. By avoiding that limitation in your IRA, you can more quickly and readily manage the portfolio in the account.
As its name implies, limited margin in an IRA has its limitations as compared to a traditional margin account. In a limited margin IRA account, you are restricted from borrowing against existing holdings, using leverage, creating cash or margin debits, selling short, or selling naked options.
How do I qualify for limited margin in my IRA account?
This feature is available for most types of IRAs, including Traditional, Roth, SEP, Simple, and Rollover IRAs.
The minimum to open a limited margin IRA is $25,000. If your limited margin IRA is identified as a pattern day trader (“PDT”) account, you must also maintain at least $25,000 in the account. If the balance of a limited margin IRA that is identified as a PDT account drops below the $25,000 threshold, you will receive an equity call. Until you deposit cash or marginable securities to restore your account to the $25,000 minimum or the equity in your account rises back above that level, the account will be restricted to cash-settled status. You are only subject to maintaining the initial $25,000 cash requirement if your account activity deems you a pattern day trader.
It is important to note that annual IRA contribution limits affect the amount you can deposit to meet an equity call, so to avoid equity calls and challenges around IRA contributions, you must always be aware of the equity in your account before placing trades.