TravelFree
Active Member
What type of account is it that is "tax free" that allows option trading? Or did you mean tax deferred?
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Tax discussion, strategies and questions
- Thread starter clp1
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Knightshade
Well-Known Member
Tax free in the cap gains sense- which is a regular IRA or HSA (both of which I have and both of which allow options trading). A trade that makes 110k (or more) profit doesn't get hit with a 20-40% tax bill just for making a good trade.
Eventually for the IRA whatever dollars come out- regardless of how they grew- just get taxed as normal income years in the future.....
And in the HSA it's legit tax free in that even withdrawals aren't taxed if used for medical expenses (and you can reimburse yourself after the fact for any medial expense going back however many years since you opened the HSA- so it's best to dump $ in there (pre tax) then pay cash for medical stuff to let it grow (tax free) instead of constantly pull it out as you go. In many ways it's better than a regular IRA though contribution limits are relatively low too so doing both makes sense for most.
As opposed to say my regular cash account where converting short-term-held shares to options would potentially crush you with a massive near-immediate tax bill eating up most of the gain difference you're taking on more risk to get in the first place.
TravelFree
Active Member
Have you read through IRS PUB 590? There are many restrictions that are prohibited in a Roth IRA that are permitted in a Traditional IRA such as:
Using Margin because you are not permitted to use stocks in a Roth IRA as collateral for a loan. It appears the way around this is for the Roth Margin trader to post a cash balance with the brokerage firm as collateral.
Here's an excerpt from Investopedia:
Roth Restrictions
Many of the riskier strategies associated with options aren’t permitted in Roth IRAs. After all, retirement accounts are designed to help individuals save for retirement rather than become a tax shelter for risky speculation. Investors should be aware of these restrictions in order to avoid running into any problems that could have potentially costly consequences.
IRS Publication 590 contains a number of these prohibited transactions for Roth IRAs. The most important of them indicates that funds or assets in a Roth IRA may not be used as security for a loan.3 Since it uses account funds or assets as collateral by definition, margin trading is usually not permitted in Roth IRAs in order to comply with the IRS’ tax rules and avoid any penalties.
Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a margin call, which places further restrictions on the use of margin in these retirement accounts. These contribution limits change each year. The annual limits for 2020 and 2021 are $6,000 for people under 50 and $7,000 for those 50 or older, according to the IRS. These limits do not apply to rollover contributions or qualified reservist repayments.4
VIX calendar spreads, and short combos are not eligible trades in Roth IRAs because they all involve the use of margin. Retirement investors would be wise to avoid these strategies even if they were permitted, in any case, since they are clearly geared toward speculation rather than saving.
Different brokers have different regulations when it comes to what options trades are permitted in a Roth IRA. Fidelity Investments permits the trading of vertical spreads in IRA accounts with only $2,000 set aside as a reserve.5 Charles Schwab Corp. (SCHW) requires a balance of at least $25,000 for spread trading.6 The brokers permitting some of these strategies have restricted margin accounts whereby some trades that traditionally require margin are permitted on a very limited basis.
The use of these strategies is also dependent on separate approvals for certain types of options trades, depending on their complexity, which means that some strategies may be off-limits to an investor regardless. Many of these applications require that traders have knowledge and experience as a pre-requisite to trading options in order to reduce the likelihood of excessive risk-taking.
active trading, experienced investors can use stock options to hedge portfolios against loss or generate extra income. These strategies can help improve long-term risk-adjusted returns while reducing portfolio churn. Safeguards should be taken so that the options do not seem like a mere speculative tool in these accounts, in order to avoid potential problems with the IRS’ rules and taking on excessive risks for funds slated to finance retirement.
TravelFree
Active Member
OK- Not a Roth which is Tax free as you claimed. You're using a Tax DEFERRED IRA account.
I hadn't thought of using an HSA, but as you said you have to use it for medical expenses ( the restriction). Currently my wife a former Health insurance professional has us in excellent plans where we don't pay a dime and I have had my share of expenses. Our family insurance covers 100% and our premiums are just under $4800 a year. So I don't think we would benefit much using an HSA but I haven't looked into any of that. Thanks for the idea, though.
Yes = Qualified Charitable Deduction, often used to avoid tax on required distributions (RMD) from Traditional IRAs that aren’t needed, and of course if you have charities you want to support. Roth IRAs don’t have RMDs. Note: RMDs are waived for 2020 and I think 2021.
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Note: "Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner's lifetime. Your account's beneficiaries may need to take RMDs to avoid penalties."
Roth IRA Required Minimum Distribution (RMD).
True, I edited the post to specify Traditional IRAs which is what I was thinking of (implicit since they don’t have RMDs, as you said),
Roth IRA allows option trading, just nothing on margin. You are allowed any type of transaction - buying/selling calls or puts, however it has to be covered either by cash or stock (covered calls). This would be tax free as long as you are not withdrawing anything before age and timelimits.
Similar rules for Traditional IRA - but this is tax deferred. Fidelity does not allow any margin for option trading in this account.
I also have another traditional IRA - started just to try out their Thinkorswim platform. They allow a little bit of margin for stock purchases, but no margin for options.
TravelFree
Active Member
If you plan to use Options in a Roth IRA because the brokerage firm allows it, you better be careful not to create the impression you are speculating as defined by the IRS.
My posts were moved here from another thread but originally were created because there were some implied claims that options were being used to generate tax free income, using Option strategies such as naked calls and LEAPS. Once you go down that path it seems likely you will trigger an IRS audit that could be very costly. Information I have is that buying Puts to protect against account loss is what the IRS sees as OK as long as you have a cash balance that will be locked up.
I'm not defending or recommending any of these strategies. YOYO if you decide to gamble on your ability to know the future.
My posts were moved here from another thread but originally were created because there were some implied claims that options were being used to generate tax free income, using Option strategies such as naked calls and LEAPS. Once you go down that path it seems likely you will trigger an IRS audit that could be very costly. Information I have is that buying Puts to protect against account loss is what the IRS sees as OK as long as you have a cash balance that will be locked up.
I'm not defending or recommending any of these strategies. YOYO if you decide to gamble on your ability to know the future.
Knightshade
Well-Known Member
It's free of short term cap gains taxes- that's the heavy kick in the genitals I prefer to avoid.
There's no tax on the growth as it happens like there is in a cash account when making profitable trades.
FWIW my healthcare premium via my job is $10.00 a month, with a "high deductible" of $2600, and an OOP max if you get really really sick of $5200...and work puts $1500 into the HSA for me...so I actually profit $300/yr (plus any gains on the $1500 for the year) if I'm healthy, and a pretty reasonable cap on costs if I get sick, net less than your $4800 if you count the work HSA contribution.
You're in the opposite situation- you pay monthly regardless of being sick or not- but I don't think you'd be able to open an HSA because it requires a high deductible plan.
If you could though- yes you can only spend/reimburse on health expenses NOW- but at retirement age you can withdraw for any reason- so it's effectively a second IRA that is also potentially useful earlier for some folks (especially useful if you're already maxxing IRA contributions since the limit on the IRA does not overlap with the limit on the HSA)
Well, I read through IRS Publication 590. Didn't see anything in these to raise serious concerns for myself and the type of trading that I am doing in my IRA and Roth IRA accounts.
Selling Naked calls or Naked puts is not allowed in the IRA and Roth IRA anyways, so that would not be a concern. Buying calls and buying puts are not 'naked' as there is always a limit to 'maximum loss'. Similarly, margin trading for options is also not allowed. Selling covered calls or cash-covered puts is allowed, but since it is always "covered" it is not truly high risk or speculative. So, I am still trying to understand the context of your warning post.
I also tried to go back into the threads using the "small red arrow" to see what the posts are referring to, but couldn't identify which posts they were reference to in the original tread. Maybe if you could quote the original posts that as you state "My posts were moved here from another thread but originally were created because there were some implied claims that options were being used to generate tax free income, using Option strategies such as naked calls and LEAPS." I am genuinely curious to get these answers, as my IRA has bloated up to an extent that taxes at a later date will be an issue.
Cap gains taxes on LEAPS sold
Lets say, this year I sell Jan-2023 LEAPS, I believe the premium collected is taxable income (if expired worthless) for the year 2023, not this year when I sell them. Does someone have experience for LEAPS into following years, can someone confirm this, one way or the other?
Lets say, this year I sell Jan-2023 LEAPS, I believe the premium collected is taxable income (if expired worthless) for the year 2023, not this year when I sell them. Does someone have experience for LEAPS into following years, can someone confirm this, one way or the other?
Tax is owed when the position is closed, by you or expiration or exercise, but remember that you aren't in control of when they get exercised.
TravelFree
Active Member
I think you got it right according to the references I posted from investopedia. I too will have an issue with one IRA account for the same reason. Next year we will be in our first RMD year under the Cares act extension. Been retired for a few years now and have been doing the Roth conversion each year up to the Tax trigger level. Otherwise we live on social security income and do travel and gifting from a taxable stock trading account. Another strategy I do is to collect dividends from Qualified rather than Ordinary in a regular brokerage account so it gets taxed as Cap Gains and in my tax bracket, that's 0%. May be the last year because our dear Pres elect has threatened to end this and make all dividends taxable as ordinary income. So in 2022, get ready to be hosed by the IRS, especially retired people.
And isn’t whatever is passed in 2021, if anything, likely to not be effective until 2022?
Knightshade
Well-Known Member
Hard to tell — it was not retroactive in 2017, becoming effective with the 2018 tax year, but that law was passed and signed in December 2017 (per Wikipedia link).
Knightshade
Well-Known Member
Can you cite a case where a tax increase was made retroactive?
Only situations I'm aware of in recent years is when a tax cut or deduction was added or extended retroactively.
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