US Investors and traders can either set up a traditional IRA or a Roth IRA to trade currencies. A traditional Individual Retirement Account (IRA) allows a US investor to make contributions with pretax dollars and the account balance compounds tax-free until the funds are withdrawn (usually at retirement). The Roth IRA, on the other hand, allows contributions to be made with after-tax dollars. The account balance also compounds Tax-Free, but the funds can be withdrawn Tax Free if the Account is at least 5 years old and the account owner is over 59 1/2.
New forex traders usually ask us how much can be contributed to an IRA. The maximum contributions an individual can make to a Traditional IRA is 100% of earned income up to $5,000 ($6,000 for those older than 50). Likewise, for a Roth IRA, the maximum contribution is 100% of earned income up to $5,000 (tax year 2012). The contribution limits for both IRA types are reduced by any contributions made to either type. If you want to be able to contribute more than $5,000 to a new IRA account, go back to our main IRA page and read the section on setting up a SEP IRA.
To be eligible to make contributions to a Roth IRA, a married trader for the year 2009, who files jointly must have a modified adjusted gross income (MAGI) below $173,000. If the trader's MAGI is between $173,000 and $183,000, then they can contribute a reduced amount less than their full limit. If the trader's income exceeds $183,000, they are not eligible to contribute to a Roth for 2012.
For single FX traders, the Roth IRA phase-out limit is lower: $110,000 to $125,000 for 2009.
If you are setting up an Individual Retirement Account to trade currencies, please keep in mind that by law, there are penalties for early withdrawals. Both the traditional IRA and the Roth IRA carry a 10% penalty for withdrawals before age 59 1/2 (for exceptions to early withdrawals, please consult your Tax Advisor or the IRS).
Whereas the traditional IRA has a maximum contribution age limit of 70 1/2, the Roth IRA does not have such a limit. Furthermore, traders using a Roth IRA do not have mandatory withdrawals at any age, whereas traditional IRA investors must begin minimum withdrawals after the age of 70 1/2.
If you have not decided on whether to use a traditional or Roth IRA for your trading account, please consult a tax advisor.