IRAs, Margin and Options: What’s Actually Allowed

What most pros wish everyone knew about IRAs and “use”

So, here’s the thing: IRAs are tax shelters first, everything else second. They were built to let gains compound without annual tax drag, not to let you borrow against your portfolio like a hedge fund. That single design choice explains almost all the confusion around “margin” and options in retirement accounts, especially in 2025 when broker marketing sounds aggressive but the fine print is still, well, fine.

The legal anchor is dry but important. Internal Revenue Code §4975 treats borrowing in an IRA as a prohibited transaction. No loans to or from the IRA. No pledging IRA assets as collateral. If you do it, the IRS can assess a 15% excise tax on the amount involved, and if you don’t fix it, that can escalate to 100%. That’s not theoretical, those percentages are written right into §4975(a) and §4975(b). Compare that to a regular taxable account where Reg T lets you borrow up to 50% of a stock’s value at purchase. In an IRA, traditional margin is off-limits. Period.

Now, options in IRAs? Possible, but only where the downside is capped and there’s no borrowing. Most brokers in 2025 still use tiered approvals. The labels differ, but the pattern is consistent:

• Covered calls are broadly allowed because the stock covers the obligation.
• Cash-secured puts are usually fine since the cash fully collateralizes assignment.
• Long calls/puts are allowed because you’ve prepaid the risk.
• Debit spreads may be approved if they’re fully paid and risk-defined.
• No naked calls, no margin loans, no borrowing against the account, and no uncovered short puts, ever.

Here’s where people get tripped up in 2025: brokers still market “limited margin” in IRAs. That feature typically lets you avoid settlement delays (think same-day re-use of proceeds and avoiding good-faith violations), but it’s not a loan and doesn’t change §4975. Different firms label “Level 1/2/3” differently, Schwab’s Level 0 isn’t the same as Fidelity’s Tier 1, and E*TRADE’s “Options Level 2” might include certain spreads while another broker requires a higher tier. The approval level matters more than the homepage slogan.

Why all the caution? Because the point of an IRA is preservation and compounding inside a tax shelter. Anything that introduces unlimited downside or the possibility of a forced liquidation at the worst possible time, say a spike in volatility when rates are still relatively high this year compared to 2020-2021, defeats the point. You want the math of compounding to grind away quietly. Not exciting, but it pays.

Options can be part of a risk-managed toolkit in an IRA, but use can’t be. It’s a bright line because the tax law makes it one.

Look, I’ve sat on risk committees where a simple “covered call program” became a Frankenstein of rolling and ratio-ing. Keep it simple: defined risk, no borrowing, and read your broker’s approval grid before you click anything. Honestly, if you remember just one thing, remember this: the IRA’s superpower is tax deferral/avoidance on gains; blowing up the account with clever-but-fragile use is like putting a turbo on a lawn mower, it might move faster for five seconds, then it’s shrapnel. Maybe that’s colorful, but that’s just my take on it..

Margin in IRAs: the fine print (and the big no)

Here’s the thing: “no margin” in an IRA isn’t a broker preference, it’s tax law. Traditional margin means a debit balance, interest charges, and pledging your securities as collateral. In an IRA, that’s a prohibited transaction under IRC §4975 because it’s an extension of credit between the account and a disqualified person. And when an IRA commits a prohibited transaction, the whole IRA is treated as distributed on the first day of that year. Translation: you owe ordinary income tax on the entire balance, plus a 10% early distribution penalty if you’re under 59½. I’ve seen people learn this the hard way; it’s not theoretical.

So, what can you actually use? Many brokers offer something called “limited margin” in IRAs. It sounds like a loophole, but it’s not borrowing. It’s a settlement convenience that helps you use pending sale proceeds immediately rather than waiting for cash to settle. There’s no debit balance, no interest, no portfolio margin, and you’re not pledging assets as collateral. If I remember correctly, most brokers also bar cash-secured short puts unless fully covered by cash, again, because borrowing is off the table.

With T+1 settlement in the U.S. for equities and ETFs (effective May 28, 2024), the usefulness of limited margin shifted. It mainly helps avoid good-faith violations when you sell and immediately buy something else the same day. Under a pure cash account, if you buy with proceeds that haven’t settled and then sell the new position before those funds settle, you risk a good-faith violation. Limited margin lets the broker front the timing difference inside the account, again, without creating a loan to you. And honestly, with rates still higher this year than we got used to in 2020-2021, I’m fine not paying interest on anything. The point is speed of settlement, not use.

Look, there are bright red lines you can’t cross in an IRA. I repeat myself here because it matters:

• No short selling in IRAs. Shorting requires borrowed shares and margin, both off limits.
• No portfolio margin. That’s a use framework; IRAs can’t take it on.
• No pledging IRA assets as loan collateral, even outside your brokerage. That’s a prohibited transaction and can blow up the account status.
• No debit balances or interest charges of any kind. If you see one, something’s wrong, call the broker immediately.

And options? You can have options permissions, but they’re inside the non-borrowing box. Covered calls, cash-secured puts (fully funded), defined-risk spreads with cash reserved, fine, subject to your broker’s rules. Naked calls, uncovered shorts, or anything that could create a margin call, nope. I think the practical test is simple: could this position ever require the broker to extend credit? If yes, it doesn’t belong in an IRA.

This actually reminds me of a guy on a committee years ago who tried to “recreate” use in an IRA with too-clever options spreads. It worked until liquidity got thin for a few hours, then the exit price turned the whole thing into a loss amplifier. Anyway, the point is the same point: IRAs are for compounding, not for borrowing. I’m still figuring this out myself sometimes because brokerage features keep changing names, but the tax line hasn’t moved.

Bottom line: Limited margin in IRAs is about settlement timing under T+1, avoiding good-faith violations and missed fills, not use. Traditional margin, short sales, portfolio margin, and collateralized loans are still a hard no.

Options in IRAs: what’s usually allowed vs. off-limits

So, here’s the practical 2025 playbook most big custodians are using. If an options position is fully paid for and can’t create an uncovered obligation, you’ve got a decent shot. If it could ever require the broker to extend you credit, even for a minute, it’s going to get rejected. That’s the filter.

• Commonly allowed (varies by broker): covered calls, long calls/puts, protective puts, cash-secured puts, and defined-risk debit spreads (like verticals or calendars where your max loss is the premium paid). These are “pay up front and you’re done” trades.
• Often allowed with stricter approval: risk-defined credit spreads where the maximum loss is fully collateralized in cash or Treasuries inside the IRA. Some brokers haircut T-bill collateral slightly for safety, you know, so expect them to require enough cash/T-bills to cover 100% of max loss.
• Off-limits: naked short calls, naked short puts without full cash coverage, uncovered short straddles/strangles, ratio writes that leave you short an extra call, or honestly any trade that could create an uncovered obligation if the market gaps.

Why this looks a little stricter in 2025: After the U.S. moved to T+1 settlement on May 28, 2024 (SEC Rule 15c6-1(a) amendment), brokers tightened IRA procedures to keep everything cash-up-front and clean. Limited margin in IRAs helps with settlement timing, not use. Equity options and equities both settle T+1 now, which reduces but doesn’t eliminate the risk of timing hiccups. That’s a real, dated rule change, not marketing fluff.

Approval levels differ by broker. Expect something like Level 1-3 (sometimes 4):

1. Level 1: Covered calls and protective puts. This is the “IRA income strategy” tier, usually the easiest approval.
2. Level 2: Long calls/puts and cash-secured puts. You pay premium or post full cash. No borrowing. No drama.
3. Level 3/4: Defined-risk spreads. Credit spreads are typically okay only if the max loss is fully collateralized in cash or Treasuries held in the IRA. Some shops require limited margin enabled for spreads to auto-liquidate if something goes offside. It’s operational, not use-y.

Assignment still matters. Cash-secured puts can assign and buy you the stock; covered calls can get called away. Is that a problem in an IRA? Not if you were fully collateralized, both outcomes are explicitly anticipated. The gotcha is emotional: you might not want shares into a weak tape or to lose a long-term position into a rally. But operationally, the IRA can handle it. This actually reminds me of getting a surprise early assignment around an ex-dividend date, classic. I started explaining to my younger self why dividend arbitrage drives early exercises and then, anyway, I re-learned to check ex-dates.

What to expect during applications: you’ll fill out experience, objectives, and net worth. Income strategies like covered calls usually get approved first; spreads usually come later after you’ve shown some activity or checked the right boxes. If you’re asked about margin, remember: “limited margin” in an IRA is for settlement and tradeability under T+1, not borrowing, brokers are aligning with the SEC’s 2024 T+1 change, and they want to avoid good-faith violations, period.

Quick facts (useful right now): T+1 settlement has been effective since May 28, 2024; brokers generally require 100% cash or Treasury collateral against max loss for IRA credit spreads; uncovered short options remain prohibited in retirement accounts because they can create obligations beyond assets on hand. Same year, same rulebook.

Look, market conditions in 2025, rates still elevated, single-stock vols bouncing around earnings, AI names whipping intraday, mean assignment risk is not theoretical. If you run covered calls, pick strikes you’re truly willing to sell. If you sell puts, size so you actually want the shares. Basically the boring stuff wins in an IRA, and I say that as someone who occassionally tries to get fancy and then remembers why the guardrails exist.

2025 reality check: T+1, day-trading frictions, and “limited margin” in IRAs

Here’s the thing: T+1 made the rails faster, not frictonless. With settlement at T+1 (effective since May 28, 2024), cash from stock and option sales lands the next business day. That’s great. But in a pure cash IRA, reusing proceeds from a same-day sale to buy something else can still set you up for a good-faith violation if you sell the new position before the original sale settles. Brokers dislike that, so do you, after the second warning email. This is why many brokers push “limited margin” for IRAs: no borrowing, no interest, just operational smoothing so you can trade with unsettled proceeds inside the T+1 window without tripping rules.

And about day trading. The Pattern Day Trader (PDT) standard is a margin-account rule under FINRA Rule 4210: 4 or more day trades in 5 business days, and those trades are more than 6% of your total trades, flags you as a PDT. That designation requires $25,000 minimum equity in a margin account. IRAs can’t have true margin under IRS rules, no borrowing against the account, so brokers basically port parts of the control framework into IRAs anyway. Translation: expect tighter day-trading controls in an IRA, even with limited margin. Some will cap same-day round trips, some will throttle notional exposure, and some will simply say “no” if your behavior looks like a day-trading pattern. Look, I get it, that feels arbitrary, but they’re balancing risk and compliance.

Assignments and exercises are where 2025’s higher single-name volatility bites. If you’re short an option, you can be assigned after the close; the stock delivery settles on T+1, but your account needs the buying power now. In a cash-only setup, that can create a timing mismatch and a regulatory hold, especially if you were planning to recycle proceeds that haven’t settled yet. As I mentioned earlier, limited margin helps clean up the timing without letting you borrow. Still, I keep a little extra cash cushion, call it a few percent of the account, just in case an early assignment or an unexpected exercise shows up. You know, the thing is, it’s always the Friday before a long weekend when this happens.

On volatility: this year’s tape has been choppy, earnings weeks, AI-heavy baskets, and macro prints have boosted option premiums. Bigger premiums are nice when you’re selling risk, but gap risk is bigger too. In an IRA, uncovered shorts are off the table (same year, same rulebook), so the practical move is defined-risk spreads. Debit or credit, verticals let you box in the tail, max loss is financed and known, which keeps the account compliant and your sleep schedule reasonable. Personally, after getting tagged on a surprise guidance cut last year, I’ve become that boring spread person. And my blood pressure thanks me.

What actually changes your day-to-day in 2025

• Cash speed: Proceeds hit faster with T+1, but same-day reuse in a cash IRA can still trigger good-faith issues. Limited margin fixes the plumbing without adding use.
• Day-trading limits: PDT (4-in-5 days; $25k equity) is a margin rule, but IRAs still face broker-set caps. Expect stricter limits than in a taxable margin account.
• Assignment prep: Keep spare cash to absorb early assignments/exercises and any settlement holds. It’s cheap insurance against forced liquidations.
• Risk framing: Use spreads. 2025’s wider gaps can turn a “probability” trade into a mess. Defined-risk keeps losses inside your account’s cash/Treasury collateral.

Look, market plumbing matters a lot more when you compress time. T+1 is great, but it’s not a green light to ping-pong trades inside an IRA. If you want to be active, set up limited margin, stick to defined-risk structures, and keep a small cash buffer. Basically the unsexy stuff wins. Actually, let me rephrase that, consistently wins.

Taxes, RMDs, and staying within the lines

So, strategy is great, until it smashes into the tax wrapper. The good news: inside Traditional and Roth IRAs, your option premiums and trading gains aren’t taxed currently. That means selling covered calls, cash-secured puts, or running defined-risk spreads doesn’t create a 1099 each year. With a Traditional IRA, taxes show up later when you withdraw; with a Roth, qualified withdrawals can be tax-free, think age 59½ and meeting the 5-year rule per IRS Pub. 590‑B. It’s why people, you know, occassionally sell puts in a Roth when option premiums are juicy like they’ve been this summer with rate-cut chatter bouncing implied vols.

Required Minimum Distributions (RMDs): Under SECURE 2.0 (effective 2023), RMDs start at age 73. Option positions don’t offset that obligation. You still have to distribute the required amount in cash or in kind each year. If you’re assigned stock on a short put in December, great, you now have shares you could distribute in kind to meet part of the RMD. But an open spread sitting there in January doesn’t “count.” I’ve watched clients scramble because they thought premium income somehow covered the RMD, doesn’t. Get your estimate early in the year and keep a cash buffer. Actually, let me rephrase that, keep two buffers if your strategy relies on weekly options where timing gets messy.

Wash sale cross-contamination: In taxable accounts, wash sales disallow losses if you buy the same security within 30 days. Here’s the wrinkle that bites: per IRS Rev. Rul. 2008‑5, a loss in your taxable account is disallowed if you buy “substantially identical” securities in your IRA within 30 days. So don’t sell XYZ at a loss in the brokerage and then re-establish it in your IRA the next morning. Same ticker, same options, same problem. Keep the IRAs and taxable timelines walled off. A simple spreadsheet or calendar reminder saves real money. I’ve done the “oh, I’ll remember” thing and… yeah, I didn’t.

UBTI and partnerships: Avoid positions that generate Unrelated Business Taxable Income (UBTI) inside IRAs, often certain partnerships or MLPs using debt. If UBTI exceeds $1,000 in a year, the IRA may owe tax (filed via Form 990‑T). That’s not a death sentence, but it’s an administrative headache and defeats part of the point of tax deferral. If you really want energy exposure, consider ETF structures that don’t pass through UBTI. This actually reminds me of a 2016 blow-up I saw where the K‑1s arrived late and nobody wanted to touch the paperwork… anyway.

Rules, paperwork, and broker policies: Brokers base IRA trading permissions on IRS Publication 590‑A (contributions) and 590‑B (distributions and prohibited transactions), plus their own risk teams. That’s why you’ll see different options “tiers” across firms. Some allow spreads with Treasuries as collateral; others limit you to covered calls and cash‑secured puts. With T+1 settlement (moved in May 2024) and 2025’s wider bid‑ask gaps, operational frictions can snowball, so read the firm’s IRA options handbook before the first trade.

Quick recap that might be getting a bit complicated: tax deferral inside IRAs is powerful; RMDs at 73 still apply; wash sale cross-overs can nuke losses; UBTI above $1,000 invites a tax filing; and the 590‑A/590‑B framework is the bible your broker actually follows.

One last practical note: if you expect a large RMD this year and also run option strategies, schedule distributions quarterly. It keeps you from forced liquidations when volatility spikes, because it always seems to spike the week you’re tight on cash, right?

Okay, how do you actually set this up without headaches?

Keep it boring and repeatable. No heroics. Here’s the clean process I use with clients, and in my own IRA when I’m not overthinking it.

1. Decide what you’re trying to do, first. Income, hedging, or limited-risk speculation. If it’s income, stick to covered calls and cash‑secured puts. If it’s hedging, think protective puts against your biggest positions. If it’s limited‑risk speculation, use debit spreads where the max loss is the premium paid. Write it down. If you can’t explain the goal in one sentence, you don’t have a goal; you have a hobby.
2. Call your broker and ask very specific questions about IRA options tiers. You want to know: a) what approval level you need for covered calls, cash‑secured puts, and debit/credit spreads; b) whether cash‑secured puts are allowed in IRAs at all (some firms still say no), and c) whether defined‑risk credit spreads are permitted in IRAs. Different firms, different answers, because their risk teams read the same IRS rules and reach, you know, different conclusions.
3. Turn on “limited margin” for the IRA if your broker supports it. This isn’t borrowing; it just reduces settlement frictions under T+1. The U.S. moved to T+1 settlement on May 28, 2024 for equities and related products, which means cash and collateral shift the next business day, not two. Confirm in writing that there’s no interest or debt component; you want operational flexibility, not use.
4. Keep a cash buffer for assignments/exercises. With wider bid‑ask spreads in 2025 and more overnight gaps, you’ll get the occassional assignment when it’s least convenient. I hold 5-10% of the IRA in cash against option obligations, overkill sometimes, but it keeps me from forced sells at bad prices. If you’re running cash‑secured puts, the cash needs to be truly there, not “there-ish.”
5. Document a simple risk policy, seriously, one page. Include: max percent of the IRA you’ll allocate to options (say 10-25%), max single‑position risk (e.g., 1% of account value per trade), and rules around trading near RMD dates if you’re 73+. Remember, RMDs start at age 73 under SECURE 2.0, and option premium timing can collide with required distributions. I also note “no new positions in the 7 trading days before an RMD transfer.” Overly cautious? Maybe. But I sleep.
6. Revisit quarterly. Pull fills, look at assignment/exercise rates, compare option income to your retirement glidepath. If income is lumpy or the stress is creeping up, dial it back. I’m still figuring this out myself, my Q2 review showed I chased yield on a few weeklies; the audit nudged me back to monthlies. Small tweaks add up.

Two compliance reminders that keep you out of trouble: 1) Unrelated Business Taxable Income (UBTI) over $1,000 in a tax year can trigger Form 990‑T filing inside an IRA, rare with listed options on stocks and ETFs, but the threshold is $1,000, not $10,000. 2) Wash sales still apply within IRAs; you can permanently lose the loss if you disallow it by re‑establishing in the IRA. It’s annoying, annoying, but real.

Operational note: T+1 since May 28, 2024 compresses your “fix it” window. Limited margin can smooth clears, but it’s not a loan. If your broker can’t confirm that in writing, don’t enable it… but that’s just my take on it.

Finally, keep your settings current. Brokers change IRA options policies without fanfare. Ask annually whether cash‑secured puts and defined‑risk credit spreads remain permitted. Things change; policies change; and you don’t want to find out mid‑trade when you try to roll and can’t. Actually, let me rephrase that, you really don’t. And if any of this starts to feel like work you didn’t sign up for, cut position count in half. Fewer trades; better sleep; same retirement.

Frequently Asked Questions

Q: How do I use options in my IRA without breaking the rules?

A: Stick to positions where the max loss is prepaid or fully covered. In 2025, most brokers allow: covered calls, cash-secured puts, long calls/puts, and fully paid debit spreads. No naked calls, no uncovered short puts, no borrowing, ever. Practical steps: 1) Apply for the right options tier with your broker, 2) keep enough cash to cover assignments (I keep a small buffer to avoid accidental violations), 3) cap risk with defined spreads instead of short naked stuff, and 4) don’t pledge IRA assets as collateral. If you’re unsure, assume §4975 doesn’t let you do it.

Q: What’s the difference between margin and “limited margin” in an IRA?

A: Traditional margin = a loan from the broker. That’s prohibited in IRAs under IRC §4975. “Limited margin” in IRAs, which brokers still market in 2025, just accelerates settlement so you can re-use sale proceeds the same day and avoid good-faith violations. It is not use, and you won’t recieve buying power or pay margin interest because there’s no loan. Use it for cash management convenience, not for taking bigger swings.

Q: Should I worry about IRS penalties if my broker is pitching margin-like features in my IRA?

A: Yeah, a little. The IRS treats borrowing or pledging IRA assets as a prohibited transaction. The law literally sets a 15% excise tax on the amount involved under §4975(a), and if you don’t correct it, that can jump to 100% under §4975(b). Action items: say no to any arrangement that smells like a loan, avoid uncovered short options, don’t pledge IRA assets, and keep records showing your option positions were fully cash-covered or prepaid. If compliance emails sound fuzzy, ask for it in writing.

Q: Is it better to sell cash-secured puts in my IRA, or should I use a taxable account if I want use?

A: If you want use, a taxable account is the clean route, Reg T or portfolio margin (if you qualify) can give you borrowing power, but you’ll pay interest and face margin calls. In an IRA, do cash-secured puts only if you’re fine with no use, great for generating income on names you’re willing to own. Alternatives inside the IRA: use long calls (synthetic use with capped risk), or bull call spreads to reduce capital outlay. Personally, I keep use in taxable and let the IRA compound tax-deferred with risk-defined trades. One more note: in taxable accounts, option premium is usually short-term income in the year earned; in the IRA you defer taxes, but again, no borrowing.

@article{iras-margin-and-options-whats-actually-allowed,
    title   = {IRAs, Margin and Options: What’s Actually Allowed},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/margin-and-options-in-iras/}
}