Using funds salted away in an IRA is a time-tested futures trading strategy that may enhance your returns, although it’s by no means a riskless approach.
Investing IRA funds in the world of futures — from commodities to stock indices to financial instruments — can be a smart way to add a solid new branch to your investment portfolio tree. For many, it would mean diversifying from the traditional path of stocks and bonds.
But it’s crucial to understand that you should not invest all or even a majority of a retirement nest egg in futures. Why? Because the risks can be as substantial as the rewards.
Futures and options are not suitable for everyone, so individual investors need to carefully examine their position to fully assess their exposure, including consulting tax and financial professionals.
Advantages of Using an IRA to Trade Futures
One advantage of futures is that you may be moving into a sphere that runs counter to other investment sectors. So certain commodity instruments, say gold or oil, may move in the opposite direction of stocks. This futures trading strategy allows an investor to post gains while other parts of the portfolio are in retreat.
The IRA, of course, allows you to defer taxes on capital gains within the account, so you can generally reinvest any gains tax-free.
One big advantage to investing in futures is that it opens up a wide range of investment choices. Most people know about investing in oil, soybeans, gold and other hard commodities, but they should also consider currencies, debt and stock indexes.
Investing in futures allows increased leverage and purchasing power. If you put $10,000 into a stock, that is exactly the amount you initially control. In futures, however, the same amount invested allows you to control many multiples of that.
Stock index futures are increasingly popular because they typically cover hundreds of stocks, allowing for investors to speculate on a wide swath of stocks, rather than just one.
Potential Pitfalls to Consider
A significant risk of using your IRA account to trade in futures is that when these markets fall, the additional leverage you enjoy may very well work against you. In other words, a down market can quickly exacerbate your losses.
IRA investors also cannot write trading losses off on their taxes. That’s why it’s crucial for investors to consult a professional for tax advice.
The Bottom Line
Trading futures from an IRA account comes with its responsibilities and complexities — along with its risks and rewards. Knowing your financial position and getting expert financial advice is key before making a foray into the sector.
