IRA, or Individual Retirement Accounts, is an investment option provided by the US government for its citizens to save up for their retirement through multiple investment possibilities. IRA accounts enjoy numerous tax benefits and are naturally considered to be one of the most useful forms of long-term investments. IRA accounts help investors to choose their preferred mode of investment in a financial market such as stocks, equities, bonds, mutual funds, Forex, or commodities, and the taxes on profits are determined according to the type of IRA account chosen by the investor.
The Two Main Types Of IRA Accounts
IRA accounts are broadly classified into two different types, the Self-Directed IRA account, and the Roth IRA account. Both IRA accounts offer different features and benefits, but both have their distinctive advantages as well as disadvantages.
Self-Directed IRA Account:
Self-Directed IRA accounts are individual trading accounts that are opened and maintained by an investor. Traders can open self-directed IRA accounts without the help of any third party fund manager or custodian, and all the risks of investments and trading fall upon the owner of the IRA fund. Self-Directed IRA accounts are more suitable for investors who wish to have more control over their investments, and they usually prefer to trade the market by themselves. These types of IRA accounts accumulate money without any tax paid on the contributions or profits.
Investors are free to contribute any amount of money into their IRA account, and all profits can be reinvested into the market without paying any tax. However, investors will have to pay taxes at the time of withdrawal of funds from the IRA account, and taxes are calculated on both contributions as well as profits at the prevailing tax rates as applicable at the time of withdrawal. Self-Directed IRA accounts have a comparatively longer lock-in period, as investors can only access their funds after turning 70.5 years of age. Self-Directed IRA accounts are further divided into Deductible and Non-Deductible accounts, which differ according to the type of deductions available for contributions and earnings regarding taxes and other payments.
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Roth IRA Accounts
Roth IRA accounts are slightly more complicated than the individual IRA accounts, as they can be opened through a mutual fund, investment manager, or a bank. Roth IRA accounts can be managed by a professional investment advisor or by an asset management fund and typically involve a performance fee as well. Most IRA fund managers are highly conservative in their approach, which reduces the risk of investments. Roth IRA accounts only allow investors to contribute to their funds after paying their taxes; therefore, the amount accumulated in a Roth IRA account can be significantly smaller than the equivalent self-directed IRA account.
However, investors do not have to pay any taxes on withdrawals made from their Roth IRA accounts, as they can withdraw the entire funds without paying any taxes. Roth IRA accounts also have a smaller lock-in period, as an investor can usually withdraw funds after turning 59.5 years of age. Roth IRA also provides the provision of withdrawing funds much earlier, but the investor cannot enjoy any tax-free benefits for premature withdrawal.
Forex Trading With IRA Accounts
Due to the popularity of Forex trading in the US financial markets, the US Government, along with the IRS (Internal Revenue Service), offers the option of trading or investing in the Forex market using an IRA trading account. Investors can choose to trade the markets with their money, or they can assign fund managers or custodians to trade the markets on their behalf. There are only a handful of Forex brokers with IRA accounts that provide such services, and all of these brokers are required to be a member of the CFTC and regulated by the NFA. Forex IRA accounts are different from regular Forex trading accounts, and an investor should carefully consider the implications of IRA accounts before investing their money in such a fund. Regular Forex trading accounts offer far more flexibility regarding trading and withdrawing earnings, while IRA accounts have several limitations that hinder the freedom of trading. The only apparent advantage of a Forex IRA account is the benefit of saving for retirement and enjoying a few tax benefits, but the IRA account might not be suitable for all investors. The IRA account opening process is long and slightly more complex than opening a regular Forex trading account. Several departments have to approve an IRA account, and it takes time for an application to be accepted or rejected by the concerned authorities. It is also difficult to transfer an IRA account between different brokers or investment banks, which makes it difficult for an investor to switch to an alternate service provider to enjoy better services. However, IRA custodians do help in minimizing the amount of hassle required to open an account with Forex brokers that offer IRA accounts.
Features Of An IRA Account
Most investors choose to open a Roth IRA account that is either managed by an investment fund manager or an employer. IRA accounts can only be operated by a certified professional who is known as an IRA custodian. The IRA custodian has the responsibility of managing all the aspects of an IRA account such as opening the account on behalf of an investor, managing the paperwork, deducting taxes, making investment decisions, and providing necessary assistance to the investor at the time of withdrawal of funds. An IRA custodian can either be an individual or a custodian company that manages multiple IRA accounts through its network of partner firms and individual fund managers. IRA accounts can only be closed and the funds withdrawn by an investor after reaching a particular age. The absolute minimum age of retirement as prescribed by the IRA is 59.5 years. Any withdrawals or closing of funds before the specified minimum age will void any tax benefits, which will certainly negate the advantages of an IRA account.
Are IRA Accounts Expensive To Maintain?
IRA accounts do charge a nominal performance as well as maintenance fee. IRA custodians usually provide a detailed outline of all the fees involved, which can help investors to understand the costs involved before opting for an IRA account. Although it is not incredibly expensive to maintain an IRA account, IRA accounts do require high costs when compared to traditional Forex trading accounts. Therefore, investors should always consider the cost of maintaining an IRA account before investing in an IRA Forex retirement fund.