Yes, you can buy on margin in your IRA. It is possible to use leverage in your IRA for stocks, bonds, and real estate. Many US based websites say you can’t buy on margin in an IRA, but they’re wrong. In this article I’ll explain how you can buy on margin an an IRA and avoid all of the complexity this creates.
What these websites should say is that, while it’s legal to buy on margin in the United States, only an idiot would do so. Because of all the headaches and tax issues buying on margin in an IRA creates, most US brokers simply say no.
Buying on margin is borrowing money from a broker to purchase stock. Instead of getting a loan from your bank, you are getting a loan from your broker. Leveraging margins allows you to buy more stock than you’d be able to normally.
An IRA is allowed to take a non-recourse loan. Per the Entrust group, “A non-recourse loan is a loan in which you, as the IRA holder, are not personally liable for repaying. Once you locate a lender/bank, the lender will lend to your IRA, not to you as an individual. The lender will have no recourse against you or the balance of your IRA funds in the event of a default. The lender will only be able to recover the property and your equity. In a non-recourse loan, you may not use your personal credit to facilitate the loan.”
And here’s why only an idiot uses leverage in a US IRA: When you buy with a loan, you pay Unrelated Business Income Tax (UBIT) on the gain from that leverage.
Let’s say you you put up $100,000 from your IRA, and get a $100,000 non-recourse loan from your broker. You buy $200,000 of stock or cryptocurrency and it doubles in value over a few years (well done!).
You sell and receive $400,000 with a $200,000 gain. 50% of that gain is from the leverage you received, so $100,000 is taxed as UBI. As a result of this transaction, $100,000 flows back into your IRA tax free and you pay about 35% tax on $100,000.
As you get more and more leverage, your tax bill grows accordingly. Plus, you need to file all kinds of forms and pay the taxes each year… something that no US firm wants to deal with. For more, see the IRS instructions to Form 990-T.
All of this applies to US IRA accounts. If you take your IRA offshore, and move it into an offshore IRA LLC with a UBIT blocker corporation, you can avoid this complexity and tax cost.
Here’s how to set up a UBIT blocker. You first form a self directed IRA LLC. Then that LLC invests in a corporation. Finally, that corporation buys real estate or stocks with a non-recourse loan. Income flows to the corporation first and then from that structure into the IRA LLC as a dividend.
You can integrate these UBIT blockers in the US. But, then the corporation pays 35% in corporate tax on the leveraged gains before paying out a dividend to the US LLC. Some very large US investors do this to simplify the reporting requirements and to keep their custodians happy.
When you take this structure offshore, you eliminate tax at the corporate level. You set up an offshore IRA LLC and UBIT blocker corporation in a tax free jurisdiction. When income flows into the corporation, there’s no local or US taxes due, so 100% of the gains flow into the LLC as a dividend.
Dividends from a corporation are not Unrelated Business Income to the IRA, thus no tax is due at this second step. The offshore corporation has effectively converted the income from UBI to standard non-taxable passive income.
This “margin in an IRA” strategy only works with international investments. If you buy and sell in the US, your broker will want you to file a US return. If you buy US real estate, you will have withholding tax and other issues. Therefore, the entire transaction must be completed outside of the United States for these tax benefits to apply.
The first step in buying on margin in your IRA is to get your retirement account offshore. You do this by forming an offshore IRA LLC in a tax free country. Then your US custodian invests into that LLC and installs you as the investment manager of the account. Finally you form an offshore corporation to act as your UBIT blocker. Funds flow from the LLC to the corporation and then into your brokerage or crypto account.
Remember that the account must be in the name of the UBIT corporation. Funds must always remain in the LLC or the corporation. No account may be in your name… you can be the signatory on the offshore IRA LLC and UBIT corporate accounts, but money can’t flow into a foreign personal bank account.
For more see: Here’s how to take your IRA offshore in 6 steps
I hope you’ve found this article on using margin in your IRA to be helpful. To setup an offshore IRA LLC and UBIT blocker, please contact us at email@example.com or call us at (619) 550-2743. We’ll be happy to build a custom structure that fits your situation.