CaptainObvious

I'm not a financial or legal professional, so I apologize if my effort to provide the following data point wastes anyone's time. My 401k has a margin account at Interactive Brokers, based on plan documents from Ubiquity (formerly The Online 401k), and a margin authorization letter I provided that explicitly stated that I don't personally guarantee the account's potential losses, which I think the brokerage approved only because they uniquely do real time automated margin enforcement, the subject of numerous horror stories on the web. So far, I have never let the account borrow cash, because I don't want to deal with UDFI tax, but it's nice to have the features of margin available.

Disclaimers: I am not a lawyer, or any kind of financial expert. I am just sharing my possibly incorrect layman's understanding in the hopes that it will give others ideas to research from more authorative sources. In a minor update to this decade old threat, I'd like a mention a more recent possibly relevant Internal Revenue Service private letter ruling, 201434024, dated May 29, 2014, released August 22, 2014, at http://www.irs.gov/pub/irs-wd/201434024.pdf, that seems to indicate that short selling stock in a trust's margin account does not itself generate UDFI tax, even if the temporarily increased cash position created from initiating the short is used to buy more stock. One warning to keep in mind is that this private letter ruling was issued about a charitable remainder trust rather than a qualified retirement plan. Anyhow, it seems to me that this is an example of use of a legiatimate use margin in a trust account that apparently would not generate UDFI tax. Excerpts from pages 5-6: "In Rev. Rul. 95-8, supra, we ruled that a short sale does not create an indebtedness for purposes of § 514 because it constitutes the borrowing of property rather than money. Rev. Rul. 95-8, supra, relies on Deputy v. duPont, 308 U.S. 488, in which the Supreme Court held that a borrowing of property does not give rise to "indebtedness." The taxpayer borrowed stock and argued that payments made to the lender constituted interest. The court held that although the taxpayer had an obligation to the lender, such obligation was not an "indebtedness," because an indebtedness arises only with respect to the borrowing of money, not the borrowing of property." [...] "Rulings: 1. The borrowing of stocks by a fund in entering into short positions will not result in "acquisition indebtedness" as defined in§ 514( c) so that none of the distributive share of a fund's income or gain which is derived from the fund's trading activities, to the extent attributable to the foregoing transactions, will be treated as "debt-financed property" as defined in§ 514(b). 2. The purchase of long positions in stocks in accounts at one or more affiliates of a broker using, in whole or in part, cash proceeds from short sales made through a fund's accounts at one or more affiliates of that same broker will not result in "acquisition indebtedness" as defined in § 514© so that none of the distributive share of a fund's income or gain which is derived from the fund's trading activities, to the extent attributable to the foregoing transactions, will be treated as "debt-financed property" as defined in § 514(b). 3. The use of long positions in stocks, including some or all of those purchased with short sale proceeds, as collateral to secure the performance by a fund of its obligations to deliver stock to the broker to cover its open short positions will not result in "acquisition indebtedness" as defined in§ 514© so that none of the distributive share of a fund's income or gain which is derived from the fund's trading activities, to the extent attributable to the foregoing transactions, will be treated as "debt-financed property" as defined in § 514(b). "