401K Margin Trading Account

[Guest will]

Hi,

Many large brokers, such as Schwab, Fidelity, don't allow customers to trade with margin privileges in a solo 401K account.

However, there are several companies / services that will create Self-Directed Solo 401K plans that will allow margin privileges in a trading account. (just search for "solo 401K")

I thought margin trading in a 401K could cause issue related to prohibited transactions / self dealing? Don't margin agreements require that the retirement assets be pledged for collateral or require a personal guarantee by the account holder? Isn't that a prohibited transaction?

So is margin trading in a self-directed 401K allowed?

[ETA Consulting LLC]

I wouldn't recommend it. Sounds too much like debt financed property.

Good Luck!

[J Simmons]

I wouldn't recommend it. Sounds too much like debt financed property.

Good Luck!

That would be my concern too.

[ESOP Guy]

I wouldn't recommend it. Sounds too much like debt financed property.

Good Luck!

Just to be clear if it is debt financed property that triggers a possible tax liability that works much like Unrealted Business Income Tax (UBTI). Since the whole point of a 401(k) is to defer taxes this is a problem.

The other problem would seem to be a margin call. If the person doesn't want to sell they would have to add money. What if the additonal money turns out to exceed one of the contribution limits?

Edit:

I guess to answer your questin directly: I am unware of a rule that says it isn't allowed. I can think of a number of rules that says it is a bad idea.

[masteff]

I normally try to avoid telling someone to use the search feature, but given how easy this particular one is and the several good older threads on the topic... use the search feature for the word 'margin'. Just be careful about 401(k)s vs IRAs as they have some subtle but key differences.

The first such thread you can find with search is the following and it has a link to an older thread with some indepth discussion: http://benefitslink.com/boards/index.php?/topic/51522-investing-with-margin/

Having glanced at a few of those older threads. While it might be legal if done properly, you're opening a can of worms and the best advice has already been given: don't do it. Just because someone is offering to take your money to help you do something, doesn't mean it's a good idea; it just means they're willing to take your money.

Since you mention solo 401(k) plans, I'm going to presume that you're a plan owner and as such do not have intimate knowledge of such things as Department of Labor Prohibitted Transaction Exemptions. In which case, consider yourself warned this is not the deep end of the pool, this is the very very deep end of the pool and there are no life guards on duty.

[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.