Other than life insurance policies and most collectibles, your individual retirement account can own just about any kind of property, including foreign exchange contracts. A FOREX trade consists of buying one currency and simultaneously selling another. FOREX trading can be highly risky, so you might not consider it appropriate for a retirement account.
FOREX Trading Account
You can open a self-directed IRA with a FOREX broker and transfer in money from other IRA accounts. The FOREX broker functions as the IRA custodian. You can request a tax-free trustee-to-trustee transfer, or you can roll over money that you withdraw from another IRA account. You must complete the rollover within 60 days. Otherwise, the Internal Revenue Service will treat it as an nonqualified distribution, which is subject to taxes and penalties. Some brokerages have high minimum account balances and commissions, so it makes sense to comparison shop.
You trade currencies in pairs. For example, a USD/EUR trade is a long position in U.S. dollars and a short position in euros. You profit if the dollar strengthens against the euro, which occurs when one dollar can buy an increased number of euros. If you favored the euro, you’d trade the EUR/USD pair. FOREX brokers offer margin buying in which they lend up to $50 for every $1 you put into a trade. You might profit handsomely from a margin trade, but you can lose more than you invest.
Currency pair prices are volatile and hard to predict. The Wall Street Journal reports that the Aite Group, a Boston-based research firm, estimates that only 30 percent of all retail FOREX trades are profitable. If you make a wrong bet in a margin account, you can quickly receive a margin call from your broker requesting you to deposit more cash. If you don’t add money to the account quickly, the broker will liquidate your trade, locking in your loss. Other risks include high commissions, inconsistent price quotes, unanticipated automated trades and broker fraud.
You can take steps to help protect your IRA FOREX money. You might consider limiting or avoiding margin buying and to allocate only a small percentage of your IRA funds to FOREX trading. You might also limit the size of any one trade and set “stop-loss” orders to close out losing trades quickly. FOREX traders can set “take-profit” orders to close winning trades after earning a preset profit. Trading software can help you make disciplined trades but might tempt you to overtrade. The best protection is a deep understanding of FOREX markets and trading before putting IRA money at risk.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.