Forex Trading Your IRA Account

What is an IRA Account?

In the United States we have special retirement accounts called an IRA, or an Individual Retirement Account. An IRA is special only because of tax ramifications. The most popular types of IRA accounts are:

Traditional IRA: allows you to deduct contributions from your income to reduce your tax liability. The money in the IRA can grow tax-free, but after you retire and you begin withdrawing the money, you will have to pay income tax on the withdrawals at the current tax rate. The general theory is that when you retire your income will be smaller, therefore you are in a lower tax bracket and will have to pay less.

Roth IRA: contributions into a Roth IRA are not tax deductible. Your post-tax income must be used. However, the IRA can grow tax-free and you do not pay taxes on the money when you withdraw it. People who plan on being richer and in a higher tax bracket when they retire prefer a Roth IRA.

Note this information is intended to be "general" and not "specific" and is accurate to the best of our knowledge as of August 2012. Please consult your accountant for specifics!

Where is My IRA? Who Manages It?

Many people in the United States may have an IRA account through their employer or through an investment advisor but they have no idea how it works or who manages it. Here is a basic overview.

  • All IRA accounts are managed by an IRA Custodian.

  • The IRA Custodian company is responsible for the maintenance of the IRA, handling deposits and distributions, and executing the investment decisions (buying stocks or mutual funds, etc.)

  • The IRA Custodian company also handles all of the paperwork involved with reporting requirements.

If you do not know who your IRA custodian is or how to contact them, it is suggested that you find out and write down their contact information. If you decide to change your investment strategies you will need to be able to reach them.

Typical IRA Investment Methods

Most IRAs are invested in the stock market through one method or another. Since an IRA is intended to be savings for retirement, investment advisors will usually suggest a very conservative approach using mutual funds. Most banks even offer an IRA custodial service that allows you to park your IRA in a CD or Money Market account.

Many people don't realize that an IRA can also invest in individual stocks, metals, commodities, futures, and even forex.

Alternative IRA Investments

First it is important to note that we never, under any circumstances, recommend investing all of your retirement savings in any high-risk market, especially not Forex. You should consult with an investment advisor before making any decisions.

If you want to, you can invest your IRA in almost anything, as long as your IRA Custodian supports it. In order to open a Forex trading account, your IRA Custodian must be willing to open a "Spot Forex Trading Account" on your behalf with the broker of your choice. Most IRA Custodians don't because their sole focus is in stocks or mutual funds.

Most IRA Custodians in the USA will only work with a CFTC-Registered brokerage firm. And many will have a list of Futures and Forex brokers that they already have relationships with. If your preferred broker isn't in the list, they may not be able to open the account for you.

All IRA Accounts Have Fees

One thing that may be shocking is that all IRA accounts have fees.

If your IRA has historically only invested in mutual funds, you may have never seen these fees, but you paid them regardless. The IRA custodian may receive a type of "commission" on your investment that covers their cost to maintain your IRA.

Most IRA Custodians that offer self-directed options (such as Forex trading) charge an annual fee for the IRA custodial service rather than a percentage of your investment. There are other fees as well, such as one-time fees for opening trading accounts.

Typical IRA / Forex Setup Process

The specific steps involved may vary from one IRA custodian to the next, but this is a general overview of the typical process a person will go through when setting up an IRA account to trade in the Forex market.
  1. Select an IRA custodian to handle the record-keeping and paperwork for your IRA.
  2. Select a suitable Forex broker that your custodian supports.
  3. Fill out the application and open your account with the IRA Custodian.
  4. Transfer the funds from the old IRA custodian to the new IRA custodian, or make a new contribution.
  5. Submit the request to the new IRA custodian for them to open the new trading account on your behalf. (often this involves a standard Individual Account application with the broker, then the IRA custodian adds their stamp/paperwork to your application)
  6. Submit the request to transfer funds from the new IRA custodian into the trading account.
It can take anywhere from 1-6 weeks to go through this process depending on your individual situation. Greg Degilio from AdvantaIRA (see contact info below) has worked hard to bring their average setup time down to only 7-10 days.

Popular IRA Custodians

There are many IRA custodians that can open a Forex trading account on your behalf. You may also contact your preferred broker and ask which IRA custodian they like to work with. Here are the most popular:

Questions Regarding IRA Accounts

This article is intended to provide a general overview of Forex trading with an IRA account. No information in this article is specific. The details may vary from one IRA custodian to another. It is recommended that you consult with your accountant, investment advisor, and/or IRA custodian with any questions you may have.

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