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Futures trading is essentially buying and selling commodities (grains, cattle, OJ, etc) but in addition includes buying and selling contracts 0f foreign currency, precious metals, bonds, energy (oil/gas) and other items whose price fluctuates from day to day.  Futures traders make money by betting that prices will go up or down and trading the right to buy or sell at a given price and a set time frame.  You can trade futures in your self directed IRA.  However, while futures trading is not expressly prohibited in retirement accounts, there are a number of things to consider before executing trades.

Even though the IRS does not prohibit trading in an IRA, what you can and cannot do in your IRA will be determined by the custodian you use.  Many custodians or plan sponsors do not allow futures trading in your IRA and some just restrict trading certain commodities.  Most 401k and plan sponsors offer a limited selection of investment options.  In the same manner, many companies who offer IRA accounts place restrictions on types of investments to reduce their liability.  If you want to trade futures in your IRA or 401k, the key term is “self-directed.”  Self-directed accounts allow you to take complete control of your investment choices and typically allow futures and futures options trading.  You can also setup a proper solo 401k to be able to invest in many of these alternative investments.

In most cases, day traders make a large number of trades per week in order to generate a profit.  In order to trade a futures contract which are highly leverages, your broker will require that you keep a certain value of assets available in your account to cover all open trades, also known as margin.  Margin is not expressly prohibited by the IRS for IRAs, but have come under scrutiny in the last several years because some say they essentially use IRA assets as collateral for a loan which is an activity that is prohibited under IRA rules.  Traders should be extremely careful to get good advise from a competent attorney and follow all account rules to avoid losing the tax-protected status of their IRA accounts and incurring IRS penalties.

IRAs, 401ks and other qualified retirement plans are tax-protected, meaning that earnings in the account are not taxed immediately as they would be in a regular investment account.  Trading futures in an IRA or 401k allows you to defer your tax obligation and pay it over a longer period of time in retirement. If the account is a Roth IRA, you may not pay tax at all.  This is a great benefit to those who do well with futures trading.  However, futures trading can have a downside as well and if you have losses you cannot write off losses in retirement accounts like you could on your taxes.  This means that if you have a bad year you cannot deduct those losses from your taxable income and reduce the amount of tax you owe.  The National Futures Association warns that futures trading is very risky and as a trader myself I understand the pitfalls.  Therefore, if you chose to trade futures, choose a reputable broker and learn as much as you can about the processes and risks associated with speculative trading before you place your first order.  Also, get some training from a reputable trading education company.  Never trade with money you can’t afford to lose, and beware of any investment advisor or guru offering unrealistic profits or easy money.  Trading should not be looked at as a get rich quick scheme but should be looked at as long term wealth creation.

 

 


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