Margin trading and stock speculation have long attracted investors seeking to magnify returns by using borrowed capital, but when leverage enters the retirement account world, the rules change in important and often misunderstood ways. Contrary to popular belief, margin is not outright prohibited inside an IRA, rather it must be structured so that the IRA, and not the individual account holder, bears the obligation, with no personal guarantee or extension of credit to the owner.
When properly implemented, margin or other forms of leverage can exist inside an IRA, but doing so introduces additional tax complexity, including the potential application of Unrelated Business Income Tax (UBIT) through Unrelated Debt-Financed Income (UDFI). For investors using a Self-Directed IRA, which allows retirement funds to be deployed beyond traditional stocks and mutual funds into a broader universe of investments, understanding how margin, leverage, speculation, and tax exposure intersect is critical to building a compliant and intentional retirement strategy.
Key Points
- Margin trading allows you to borrow money to invest
- Stock speculation is at an all time high
- Be mindful of the prohibited transaction and UBTI rules when using margin in a Self-Directed IRA
That being said, margin trading is a fundamentally risky strategy that can turn a relatively safe stock investment into a high stakes bet. It allows assertive investors to buy more shares than they could otherwise afford. When things go well, these investors make a lot of money. When things go bad, it can get really nasty, really quickly.
What is Margin?
In general, margin stock investing occurs when an investor borrows money to pay for stocks. Typically, the way it works is your brokerage institution lends money to you or your retirement account at relatively low rates. In effect, this gives you more money to buy stocks, or other eligible securities, than your cash alone would provide.
Your account, including any assets held within it, then serves as collateral for that loan. However, in some cases, a personal guarantee may also be required to secure the margin loan. Also, the brokerage firm can legally change key terms at any time, such as how much equity you need to maintain. In other words, the brokerage firm is just lending you money. Regardless of how the stock performs, you will be on the hook for repaying the loan.
What is a Margin Call?
A margin call occurs when you’re required to add cash or securities to your account. This occurs when the value of the assets in your account dip below a certain value needed to secure the margin loan. If you can’t swiftly deposit the cash or stocks to cover the margin call, the brokerage firm can sell securities within your account at its discretion. In such cases, the brokerage firm is typically selling stocks that have dropped in value, further deepening the individual investor’s losses.
Margin & Self-Directed IRA
In general, Internal Revenue Code Section (“IRC”) 4975 prohibits an IRA holder from engaging in any transaction that involves:
- (A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
- (B) lending of money or other extension of credit between a plan and a disqualified person;
- (C) furnishing of goods, services, or facilities between a plan and a disqualified person;
- (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
- (E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
- (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
A “disqualified person” is essentially defined as the Self-Directed IRA holder and any of his or her lineal descendants as well as any entity controlled by such persons.
So long as one is not required to personally guarantee the margin used in the investment and the only collateral being used is the underlying securities or cash, then the use of margin in an IRA would not trigger the IRS prohibited transaction rules. However, if one is required to personally guarantee the IRA margin obligation, then that activity would seemingly violate the IRS prohibited transaction rules under IRC Section 4975(c)(1)(B).
Book a free call with a self-directed retirement specialist
- Review your self-directed retirement options
- Learn about investing in alternative assets
- Get all of your questions answered
Margin & UBTI Tax
Almost all retirement account investments generating passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax. However, the UBTI tax is triggered in three circumstances:
- Retirement account uses margin to buy stock
- Retirement account invests in an active business through a passthrough entity, such as an LLC, or
- An IRA uses a nonrecourse loan (real estate acquisition financing) to purchase real estate
Hence, if a Self-Directed IRA uses margin to buy stock or securities and the IRA holder is not required to personally guarantee the margin loan, the UBTI tax would apply to the gains attributable to the margin percentage. For example, by way of a simple example, if one had $100 in their IRA and borrowed an extra $100 to buy AMC stock, 50% of the gains would be subject to the UBTI tax, which has a maximum tax rate of 37% for 2026 over income above $15,000 or so of income.
Conclusion
Ultimately, the ability to use margin or other forms of leverage inside a Self-Directed IRA is not simply a question of what is permitted, but how it is structured and administered. The IRS rules governing prohibited transactions, personal guarantees, and Unrelated Business Income Tax are highly technical, and even well-intentioned investors can inadvertently trigger disqualification or unexpected tax liabilities if these rules are misunderstood or misapplied. Working with tax and retirement experts who deeply understand the intersection of margin, leverage, prohibited transaction rules, and UBIT allows investors to pursue more sophisticated strategies while maintaining compliance, protecting the tax-advantaged status of the IRA, and avoiding costly mistakes that can undermine long-term retirement goals.
About the Author
Adam Bergman is a tax attorney and the founder of IRA Financial, one of the largest Self-Directed IRA platforms in the United States. He has helped more than 27,000 clients take control of their retirement savings, overseeing over $5 billion in retirement assets. Adam is also the author of nine books focused on helping investors understand and confidently manage their retirement strategies.
