The everyday investor becomes familiarized with stocks, bonds, and mutual fund investing through the individual retirement accounts (IRAs) that are setup through their employer. As the years go by, this retirement nest egg begins to grow, and investors become more proficient in managing their investment portfolios. Most financial institutions where an investors’ IRA portfolio is held, limits them to investing in traditional stocks, bonds and mutual fund investments. As a result of this, investors start researching other ways to invest in their retirement portfolios, realizing the value of diversification. This research may lead an investor in the direction of managed futures, but the lack of knowledge on how to invest in managed futures through an IRA can turn an investor away.
Contrary to common belief, investing in managed futures and CTA strategies through an IRA account is actually quite simple. Since most financial institutions will not allow you to invest in futures strategies, the first step is to “roll over” some of the funds in your IRA account into a “self-directed” IRA account, held by a custodian who accepts futures accounts (a couple of the custodians we work with are mentioned at the end of this article). A self-directed IRA account is no different than a regular IRA account; the only difference is that you, the investor, is “directing” the placement of your funds. “Self directed” IRAs allow you to invest in managed futures, while still maintaining tax deferred growth because the assets are contained in an IRA.
Despite how daunting it may sound, rolling over (aka transferring funds) some of your funds from your existing IRA account simply requires the completion of a few forms. Once these forms have been completed, your custodian that will manage your futures investments will take care of the entire roll over process. The neat thing about opening a self directed IRA, is that you get to decide how much of your IRA funds you would like to move from your current financial institution. We recommend starting with an amount you feel comfortable with and leaving the balance with your existing institution. As you get more familiar with managed futures investing, you are free to transfer (or “roll over”) more funds as you please.
Investing in futures can provide individuals the opportunity to diversify their retirement accounts by providing access to trade commodities, futures, and forex. While futures investing carries greater risks, it can also give investors flexibility and investment strategies beyond the stock market. Investing through a self-directed IRA can also provide tax advantages as trading profits will be tax-deferred (or tax-free through a Roth IRA).
Futures generally have a low correlation to traditional investments in stocks and bonds.
Benefits of Investing in Futures With Your IRA
- Building for Retirement
- Most Americans do not want to rely on Social Security.
- Earnings Growth
- The gains within self directed IRAs and other plans accrue on a tax-free or tax-deferred basis to benefit you when you retire.
- Tax Deductions Can Be Taken on Contributions to Your Self Directed IRA
- While this does not apply to Roth IRAs—most contributions to other retirement plans and self directed IRAs are eligible deductions on your income taxes.
- Roth Self Directed IRAs Are One of the Most Beneficial Retirement Plans Available
- All contributions are made after tax, but the earnings grow on a tax-free basis provided that certain requirements are met.
- Uncorrelated returns
- Managed futures has historically, over time, exhibited zero correlation to equities.
- Diversification
- Managed futures has provided better diversification than many other hedge fund strategies during major equity market declines.
- Bi-directional
- Managed futures strategies have the potential to profit from bull and bear moves subject to market conditions.
- Multi-asset
- CTAs typically trade a range of financial, commodity and foreign exchange markets and potentially benefit from trends in these markets.
- Systematic
- Most CTAs use systematic strategies which have been tested for validity on historical data.
- Transparent
- CTAs typically trade highly liquid markets on regulated exchanges which can be marked-to-market continuously.
- Portfolio Benefits
- Academic and industry research has shown that adding managed futures to a traditional portfolio of stocks and bonds has resulted in better outcomes, over the long term, in terms of reduced drawdown and portfolio volatility and enhanced risk-adjusted return
Source: Midland Trust, CME Group, aiSource
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Disclosure: J.D. Turner Capital, LLC is registered as an commodity trading advisor with the Commodity Futures Trading Commission and an NFA Member. Futures and options is speculative, involves risk, and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All information, communications, publications, and reports, including this specific material, used and distributed by J.D. Turner Capital, LLC shall be construed as a solicitation for entering into a derivatives transaction. J.D. Turner Capital, LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.
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