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Futures Trading w Self-Directed IRAs


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Futures Trading w Self-Directed IRAs

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  #1 (permalink)
JTurner77
Los Angeles, CA
 
 
Posts: 68 since Dec 2011
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I am looking for feedback from anyone who is trading futures through their self directed IRA.

1. Were any of you able to open up an account without also signing a document promising to pay back any losses were the account to go into a debit?

When I signed up with my IRA custodian, I only asked if I could trade futures with a self directed IRA through them. They assured me that I could.

However, one of the brokers I am interviewing stated that they don't think I will be able to open an account with them (we will find out for sure on Monday) due to the fact that my custodian will not allow me to open any account where I an be personally liable for any debits that may arise in the trading account.

I got the impression from the conversation, though I failed to ask directly, that this was a universal rule that all self directed custodians adhere to. Has anyone run into a similar obstacle hurdle?

2. Additionally, for those who are trading futures in a self direct IRA, are your margin requirements stricter than regular individual accounts with the same broker. Though I have no desire to trade with margins that are lower than overnight initial margins, this broker stated that I would only be able to trade with full regular margin requirements. FWIW, I think this is prudent and don't mind.

However, I am just trying to figure out which of these requirements/policies are universal/regulated by law and which ones are at the discretion of the clearing firm.

Thank you in advance for taking the time to respond. I appreciate it.

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 Big Mike 
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You will be required to sign that agreement, to pay back losses.

My self directed IRA is full margin. Not sure about others, it doesn't impact me. If you are trading on less than full margin it is probably a smart decision to not trade with retirement funds.

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  #4 (permalink)
JTurner77
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Big Mike View Post
You will be required to sign that agreement, to pay back losses.

My self directed IRA is full margin. Not sure about others, it doesn't impact me. If you are trading on less than full margin it is probably a smart decision to not trade with retirement funds.

Mike

Mike,

Thank you for taking the time to respond. So, in plain English, this is a hurdle that my custodian is placing upon me since obviously your custodian didn't have a problem with you signing this document.

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 Big Mike 
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I can only say that I've signed that agreement with every futures account I've opened regardless of what it was.

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  #6 (permalink)
cubano
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@JTurner77, first off... the custodian is protecting you... simply stated, the moment you pay losses on that IRA futures account with funds outside of the IRA you will have to have a nice chat with the IRS about penalties... the best simplest way to trade futures within an IRA is with Interactive Brokers..

SD IRA's are mostly used when you want to either do private placements to funds using IRA $$$ or if you want to purchase hard assets (REO, etc.) via an LLC (which is in terms owned by an IRA)... you can indeed trade via a SD IRA by simply making a placement to an IRA LLC and then having the IRA LLC open the futures account... as long as the IRA LLC has enough assets the whole concern over credit risk with the FCM goes away... if dont recommend it if you have anything less than $50K in that IRA to be honest..

I would be concerned with signing anything that imposes individual liability when the owner of the account is the IRA trust... that is just opening oneself to issues with the IRS where they could even invalidate the trust and you will be facing deep penalties.

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  #7 (permalink)
JTurner77
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Big Mike View Post
I can only say that I've signed that agreement with every futures account I've opened regardless of what it was.

Mike


Mike

This has been a pretty surreal experience and I am beyond puzzled. Last night I did some research and have come across numerous instances where people are saying that personal guarantees are essentially a prohibited transaction that have actually disqualified the IRA.

Here is one such example from CPA Magazine:


Quoting 
In general, a requirement of opening an IRA with a brokerage firm is to agree to the brokerage firm’s standardized “brokerage agreement.”

A typical term in the brokerage agreement is a requirement for the client to personally guarantee the account and/or grant the brokerage firm a lien on all other assets including personal accounts the client may have at the firm.

Recently, we requested a ruling from the Department of Labor as to whether such language would be considered an extension of credit and thus a prohibited transaction. (Under Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code was transferred to the Secretary of Labor. The Secretary of the Treasury is bound by the interpretation of the Secretary of Labor pursuant to such authority.)

In October of 2009, the DOL released Opinion 2009-3A. In its Opinion, the DOL stated, “Here, the requested granting of a security interest in the assets of the IRA owner’s personal accounts to the broker to cover the IRA’s debts to the broker is akin to a guarantee of such debts by the IRA owner. This would amount to an extension of credit from the IRA owner to the IRA."

I also read the following info from this estate planner:



Quoting 

In a recent DOL Advisory Opinion Letter 2011-09A (October 20, 2011) the DOL stated that an IRA owner's personal guaranty to cover losses incurred in an IRA account agreement due to trading futures was a prohibited transaction because the personal guaranty was not an exception allowed for either operating expenses or expenses incidental to the ordinary operation of the plan. Any owner of an IRA with these types of prohibited transactions would be deemed to have their IRA immediately distributed and taxed.

In an unusual twist of events in response to these two DOL Advisory Opinions, the Internal Revenue Service (the "IRS") provides relief and good news! Announcement 2011-81 clarifies the treatment of IRAs with personal guaranty agreements. Even though a prohibited transaction would occur at the time the IRA agreement was signed, the IRS will only treat the transaction as a prohibited transaction if non-IRA monies were actually used to satisfy outstanding debts of the IRA or IRA monies were used to satisfy debts of non-IRA assets.

Advice:

Although the IRS can adjust how it will treat prohibited transactions, only the DOL can grant exemptions to being classified as a prohibited transaction. Thus, if you have a client that entered into a personal guaranty IRA agreement, make sure your client does not allow IRA monies to be used to pay the debts of non-IRA assets or vice-versa to avoid a prohibited transaction.


Correct me if I am wrong, but based on the information I have presented, does it not suggest that up until October 2011 that all futures accounts with signed personal guarantees were by definition engaged in a prohibited transaction that thus rendered them distributed and subject to taxes and penalties?

Am I missing something?

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 Big Mike 
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I'm not a lawyer or accountant. Just a trader. I suggest contacting your lawyer and accountant for legal and tax advice.

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  #9 (permalink)
JTurner77
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Big Mike View Post
I'm not a lawyer or accountant. Just a trader. I suggest contacting your lawyer and accountant for legal and tax advice.

Mike

Mike

I understand that you are not a lawyer or accountant so I am in no way trying to put you or anyone else on the spot nor will I take it as legal advice. I totally understand your cya disclaimer.

With that said, I am amazed that there really hasn't been much discussion on these forums on this subject. There is an entire cottage industry being built upon the notion that you can trade futures through an IRA.

First, the majority of self directed IRA custodians say, "Sure, you can trade futures!"
Second, the overwhelming majority (if not all) futures accounts require personal guarantees, as you attested to above and I think we all agree is the norm.
Third, it appears that these personal guarantees are widely believed to be prohibited transactions.


It is just beyond bizarre to me that there may be tens of thousands of IRA invalidated by unsuspecting individuals who have been told by professionals that it is okay to trade futures. Like I said, I am shocked that this issue hasn't been raised here.

Right now I am feeling a little cheated and annoyed by the collective marketing efforts of these self directed custodian companies. It is almost like being told you can buy a car and later learning that you are not allowed to put gas in the tank.

I am recently active poster here and will refrain from posting any further on this subject as I fear I may be on the verge of overstaying my welcome. But I would love to hear how other people with IRA accounts feel about this.

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  #10 (permalink)
 tturner86 
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JTurner77 View Post
Mike

I understand that you are not a lawyer or accountant so I am in no way trying to put you or anyone else on the spot nor will I take it as legal advice. I totally understand your cya disclaimer.

With that said, I am amazed that there really hasn't been much discussion on these forums on this subject. There is an entire cottage industry being built upon the notion that you can trade futures through an IRA.

First, the majority of self directed IRA custodians say, "Sure, you can trade futures!"
Second, the overwhelming majority (if not all) futures accounts require personal guarantees, as you attested to above and I think we all agree is the norm.
Third, it appears that these personal guarantees are widely believed to be prohibited transactions.


It is just beyond bizarre to me that there may be tens of thousands of IRA invalidated by unsuspecting individuals who have been told by professionals that it is okay to trade futures. Like I said, I am shocked that this issue hasn't been raised here.

Right now I am feeling a little cheated and annoyed by the collective marketing efforts of these self directed custodian companies. It is almost like being told you can buy a car and later learning that you are not allowed to put gas in the tank.

I am recently active poster here and will refrain from posting any further on this subject as I fear I may be on the verge of overstaying my welcome. But I would love to hear how other people with IRA accounts feel about this.

Why would you want to trade futures through an IRA? What is the benefit?

Futures trading and IRA are two different areas for me. I would not want to take the same risk I do in futures with an IRA. So to me it seems absurd to trade futures through an IRA.

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  #11 (permalink)
CafeGrande
St Paul, MN, USA
 
 
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Intrust, Chicago handled futures accounts in an IRA. They went bankrupt in 2000 and 14 years later the lawyers, accountants and regulators are still dealing with the fallout (less charitably, milking it dry with their fees).

I don't recall the details of WHY they went bust, but make sure you do a lot of research on the trust company if you go this route.

https://intrust.com/newsrel1/Notice_of_Filing_and_Twelfth_Annual_Report.pdf

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 CannonTrading   is a Vendor
 
 
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There are a few IRA custodians who allow trading futures on IRA accounts. Please note, unless this is risk capital, trading futures on an IRA account is not for everyone. With clearing firms they will usually have the client sign an account guarantee which is standard for all IRA Futures accounts.

PM with any questions about Cannon Trading (800) 454-9572 (310) 859-9572. Trading commodity futures, forex and options involves substantial risk of loss. The recommendations contained in this post are of opinion only and do not guarantee any profits. These are risky markets and only risk capital should be used. Past performance is not necessarily indicative of future results.
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JTurner77
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Ilanlm View Post
There are a few IRA custodians who allow trading futures on IRA accounts. Please note, unless this is risk capital, trading futures on an IRA account is not for everyone. With clearing firms they will usually have the client sign an account guarantee which is standard for all IRA Futures accounts.

The problem is the personal guarantee. Signing one on behalf of your IRA is apparently a prohibited transaction or at the very least will be considered a prohibited transaction should you actually have to pay for the incurred losses with funds outside your IRA.

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