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In This Issue:
Traders and taxes. What are your plans for managing your retirement account? Marilyn McDonald of Interbank FX discusses Roth IRAs.

January 3, 2007

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It’s That Time of Year Again… New Year’s Resolutions

Well, it is that time of year again.. the first of the year and we all vow to become thinner, richer, and happier. I can’t really help you with thinner or happier but I have a suggestion for managing your future retirement accounts.

I get plenty of questions about traders’ taxes. And while I admit that I am no expert I have managed to pick up a thing or two. Most of the information surrounding taxation and the forex traders' account is confusing at best. There are plenty of articles and experts willing to discuss the fine points of this topic; should your transactions be treated as IRC 988 foreign currency transactions? Or should you get the 60/40 tax treatment? And which tax code section really applies, IRC 1256 or IRC 988? It is enough to make my head spin.

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Tax free at retirement?

Enter the Roth IRA. Roth IRAs were first made available to investors in 1998 and has really changed the way that some investors save for their retirement. Like your traditional IRA, a Roth is an individual retirement account that allows you to shelter your money from taxes. But the Roth IRA works just a little differently.

Firstly, you are not allowed to deduct your annual contributions so you will have to fund your accounts with money you have already paid taxes on. However, at retirement your gains (that is the plan, right??) withdrawn from your Roth IRA come out tax-free. That includes the withdrawal of your principal contributions because you already paid those taxes.

Compare that to your traditional IRA and the Roth starts off with a disadvantage (no contribution deductibles) but finished with a huge advantage (tax free withdrawals). Because it takes some time for the Roth to overcome it’s initial disadvantages it tends to be more appropriate for those accounts that you will hold for long time frames.

The fine print

There is some fine print associated with the Roth IRA. It has some income restrictions. Last that I heard, only married couples earning less than $150,000 and singles earning less than $95,000 qualify to make full contributions each year. Also, couples earning more than $160,000 a year and singles earning more than $110,000 can’t make any contributions at all.

So, what is a full contribution? Roths allow you to contribute $4,000 a year through 2007 and $5,000 in 2008. After that contributions will be adjusted for inflation.

Opening your Roth IRA

While there are some brokerage firms that you can open a Roth IRA with directly there are some others that y ou cannot open a Roth IRA with directly because they are not custodial firms. However, you can ask a Roth IRA custodian to approve your trading account with your chosen brokerage.

The process is as follows (as a general rule, if I am off on one or two of the steps please don’t call and growl):

1. Contact a custodial firm and set up an account with them, if you already have a custodial account make sure they will allow trading with your favorite brokerage firm.

2. The custodial firm will then ask you to fill out the Account Application at your brokerage and send the original application to them (the custodial firm).

Most likely the name of the brokerage account will be established as: 'CUSTODIAN COMPANY F/B/O YOUR NAME.' Additionally, only the custodian is authorized to deposit or withdraw the trading account funds; you may not deposit or withdraw funds directly.

3. After the custodial firm has sent the application to your chosen brokerage and it has been approved, your broker will send out the funding instructions. The funds need to be sent to the custodial firm first and they will forward the funds to broker.


So, is a Roth IRA in your future? Perhaps, I would suggest that you explore the issue as thoroughly as you would any other issue that confronts your financial well being. As far as making trading taxes easier? Well, it certainly helps. There are no forms to report a Roth contribution. The financial institution, which is the trustee of your Roth IRA, will send you information on the amount in your Roth IRA. They will also send the information to the Internal Revenue Service.

It could just be the answer to one of your New Years' resolutions.

About Today's Author:

Marilyn McDonald has worked in the trading and financial services industry for a number of years, currently with Interbank FX and prior to that at Reuters working with MetaStock. She has a strong advertising and marketing background. She loves to travel and has lived in a number of different countries but now resides in Utah with her son, a tank full of fish and two cats.