Can I buy on margin on my IRA?

Some investors are turning to buying on margin for their investments. Buying stocks on margin, to put it simply, is doubling your buying power buy borrowing up to 50% of a stock's price from your broker.

Typically, if you want to buy stocks on margin, your broker will set you up with a margin account. Let's say you put $5,000 in it. That gives you $10,000 of buying power, since you can borrow up to 50%. If you decided to spend $4,000 on a certain stock, that would leave you with $6,000 worth of buying power - $1,000 in cash and $5,000 in your margin account (excluding commissions). The money isn't borrowed until the cash is gone

In order to buy stocks on margin, there are a certain number of things to keep in mind. First of all, certain stocks can't be bought on margin. For example, any stock that is less than $5 a share (also called penny or micro-cap stocks) cannot be purchased on margin. In addition, IPOs (Initial Public Offerings, or companies that have recently gone public) also can't be purchased on margin until they've been on the market a certain amount of time.

In addition, you cannot buy on margin on your IRA. An IRA, or Independent Retirement Account, is a tax-deferred retirement account for a person that allows them to set aside a certain amount of money each year (up to $4,000 per year for those under 50 and $4,500 a year if over 50). The earnings are not subject to tax until you begin to draw the money out at age 50 ½. You can also withdraw the money earlier, but it's subject to a 10% penalty in that case. If you are participating in a pension plan from your employer, though, your contributions to you IRA are deductible.

There are two types of IRAs - traditional IRAs and Roth IRAs. The traditional IRA is the one mentioned above-tax-deferred. A Roth IRA is not tax-deductible, but it doesn't come with the penalties that the traditional IRA does. For one, any contributions can be withdrawn without being subject to any penalties or taxes, except for interest earned in the account. However, after five years have passed, the contributions as well as the interest can be withdrawn with no penalties or taxes.

While you can't use margins for your IRA account, you can use equities and options trading. An equity trading occurs when you borrow funds to increase capital investment with the hopes that the business will be able to make proceeds that are larger than the interest.

Buying on margin is a risky venture anyway. If the stock plummets, you could end up owing more than your initial investment. If it falls below 75% of its original value, the broker will issue what is referred to as a margin call since the investor must have at least 35-55% equity in his account at all times. A margin call means the investor much put more money into the account. If he can't do this, however, he'll have to sell the stock, pay the broker the amount owed, which might even be more once commissions are figured in. This can result in stresses and increased costs to the investor.

An IRA is a great way to save for retirement and should be taken advantage of, if possible, even if margin funds are unavailable for your IRA accounts.