Covered calls in a Roth IRA account.

[Guest TrentR]

Is it legal to use a Roth IRA to sell covered calls or puts? Most of the brokerages i've seen require a margin account to handle these transactions, so i guess the question is can a Roth IRA account be a margin account?

[John G]

I don't know if it is Federal law/regulation, SEC rules or brokerage rules but I am not aware of any custodian that will consider "margin" capabilities on IRA accounts. Some, but not all custodians, will allow covered calls and "married puts".

[Kathy]

I believe the problem falls under the Prohibited Transaction rules of section 4975 of the code.

[John G]

Kathy, because this is not something I do with IRAs, I checked with Schwab about their policy. My prior comment was based upon their info. It has not been clear to me what rules are set by IRS/SEC or what is imposed by brokerages. With both covered calls and married puts, the account does not face unlimited exposure, which makes sense since you just can't add money to an IRA to make up for a bad investment decision. My information is anecdotal, so please correct me if I am wrong.

[Kathy]

I may be way off base too but I think the issue is the margin account contsitues lending of money between the IRA and an interested party and/or an assignement of the IRA assets, both of which are PTs which, althoug only subject a QRP to an excise tax, completely blows an IRA out of the water.

[John G]

Simple answer: check your custodian. The custodian rules will govern your personal degrees of freedom. Custodian rules can be no less strict then Federal/IRS rules, they can be more restrictive.

[This message has been edited by John G (edited 03-26-99).]