QUESTION: On another note, I was trying to find out the rules regarding margin trading in
the solo 401k While there are many seemingly conflicting opinions about this,
do you agree that it can be said that margin accounts are allowed, certain
derivativesrequiring a margin account are allowed; but buying equities on margin
is definitely disallowed as the portfolio balance could (theoretically) fall
below zero? I was hoping to be able to take advantage of the low margin interest
rates and use a margin loan of ca. 10% of the portfolio to buy more equities or
even long-term corporate or Build America bonds so as to take advantage of the
yield curve which from a portfolio-theoretic asset-liability point of view might
just make sense with a long time horizon. I understand, however, this is never
allowed in a Solo 401k plan account, just like real estate leverage is only allowed with
non-recourse loans. Although I didn't find a citation of the law or regulation
regarding the margin rules especially regarding buying securities on margin,
just opinions. I am aware of the UBIT issues but I'm interested whether using a
margin loan is allowed per se. I would appreciate if you could clarify.
Thnx, KE
ANSWER: It has always been my understanding that 401k
plans can trade on margin, provided the brokerage firm allows for it. I recall
seeing language to this effect on several brokerage forms account opening
documents. UBIT applies to a Solo 401k plan that incorporates margin trading. This is different from a
non-recourse loan whereby the loan proceeds are used towards the purchase of
real estate by the Solo 401k, resulting in non-payment of UBIT provided the
real estate is not an operating company (e.g., a hotel).
I'm confused. So you can use a margin account in a solo 401k but do you have to pay taxes on it?
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