Q:

Subject: TAX QUESTION

Hi Kerry,

I had heard a rumor that "the only kind of stock options that can be invested in ( or played ) in a self-directed Roth IRA is…..

Covered Calls. "     True ??  False ???  

My wife  & I both have a Roth IRA,  and we are doing some "covered calls" and also "credit spreads", straddles, and others……

Are we in trouble already ??

A:

You need to track down the documentation for that rumor because I have never heard of any such restriction.  I checked some of my reference materials and websites (such as rothira.com and fairmark.com) and couldn't find any mention of such a specific limitation on acceptable investments.

It has always been my understanding that Roth IRAs are allowed to invest in any of the same kinds of things as conventional IRAs, which generally fall under the "prudent man" type of umbrella.  Highly speculative and risky investments, such as lottery tickets, wouldn't meet the prudent man test; so if any of your options trading techniques fall into that category, you might have a problem defending it.

For self directed accounts, there is generally a governing document that spells out the rules, usually in a very general sense.  If your account's governing documents don't specifically mention a limit on the kinds of investments that are acceptable, the general rule should apply.

Basing investment and tax strategies on word of mouth rumors that have passed though who knows how many people already is crazy.  So, anybody who is claiming to have such information that is counter to conventional wisdom should be required to back those statements up with something more substantial than "a friend of a friend told me."

That's the best I can come up with.  Please pass on anything more definitive that you come across.  In the meantime, I wouldn't worry about what you are doing, especially if your Roth accounts are making profits because that on its face would prove that the investments are good.

Kerry

First Follow-Up:

Kerry,

  As always you are wonderful.  Yes I agree that whoever says such things should back them up, etc,etc. but, I wouldn't trust anything they

would produce as backup.  I trust you, your experience and backup.  You have confirmed basically what I thought to be true.

  I figured that if it wasn't allowed, then our brokerage wouldn't allow us to do it. (because some brokerages won't let their customers do these

kinds of transactions but ours is fairly liberal, therefore, it must be legal for a Roth IRA)

 

  My ultimate "backup" is you. "You're the Guru", you're to "go to guy".

 

  Thanks for letting me interrupt your day, I appreciate your time and efforts....

My Reply:

You're absolutely right that, even though they aren't infallible, stockbrokers that handle IRA accounts should be up on any restrictions of the kind you mentioned.

Kerry

Second Follow-Up:

Talk about timing, 

I swear, I didn't ask these guys for anything...It just showed up in my mail.....kinda makes you go , "Hmmmmm"

  

-------------------------------------------

Dear Mr. …,

You have requested the ability to engage in options combination trading (including American-style spreads) in your IRA account, for which Delaware Charter Guarantee & Trust Company acts as trustee.  Certain of these transactions may only be recorded in margin accounts according to requirements of applicable rules. 

Accordingly, optionsXpress has approved your IRA account as a Limited Margin Account.  As a Limited Margin Account, you will be permitted to engage in combination options trading, including American-style spreads; however, you will not be permitted to engage in other margin transactions (i.e. utilizing lending).

Please refer to sections 31-34 of your account agreement for margin terms that apply to your IRA account.  Also, please refer to the Margin Risk Disclosure Statement, which is provided to all margin accounts and available on our website.

Your IRA account continues to be subject to the terms of Delaware Charter's Self-Directed Individual Retirement Trust Agreement. If you have any questions, please contact customer service at 1-888-280-8020 or through the Live Help banners on our website.

Sincerely,

Fred E. Cadena
Assistant Vice-President, Risk and Margin
optionsXpress, Inc.
Member NASD | SIPC 

 
Final Words:

That does seem to be very coincidental timing.

Does your agreement with them have some kind of Big Brother clause, allowing them to monitor your emails?

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/29/2006 02:55:00 PM Send this post: