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Pocket 401(k) for Foreign Currencies/Options

foreign currencies/options

IRA Financial’s Pocket 401(k) will allow you to use your retirement funds to invest in all types of currencies or option investments, directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party 401k custodian involved in every aspect of your investment transaction. Make currency and option investments on your own directly from a mobile device or PC with IRA Financial’s Pocket 401(k) for Foreign Currencies/Options. Additionally, rollover, deposit, or transfer funds between your investment and 401k seamlessly and without delay.

Why Currency & Option Investments

Forex Trading

The foreign exchange market (Forex) is where currencies are traded. For speculators, this market provides opportunities to take advantage of movements in exchange rates. Unlike stocks, futures, or options, currency trading does not take place on a regulated exchange. All members trade with each other based on credit agreements.

The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader’s account.

Since currencies always trade in pairs, when a trader makes a trade, that trader is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, they would have exchanged euros for dollars and would now be short euros and long dollars.

The majority of dealers trade the seven most liquid currency pairs in the world, which are the four “majors”:

  • EUR/USD (euro/dollar)
  • USD/JPY (dollar/Japanese yen)
  • GBP/USD (British pound/dollar)
  • USD/CHF (dollar/Swiss franc)

Option Trading

Options trading can be complex, even more so than stock trading. When you buy a stock, you decide how many shares you want, and your broker fills the order at the prevailing market price or at a limit price. Trading options involves an entire set of new components.

When one takes out an option, one is purchasing a contract to buy or sell a stock, usually 100 shares of the stock per contract, at a pre-negotiated price by a certain date. In order to place the trade, one must make three strategic choices:

  • Decide which direction you think the stock is going to move.
  • Predict how high or low the stock price will move from its current price.
  • Determine the time frame during which the stock is likely to move.

An option is a contract between a buyer and a seller relating to a particular stock or other investment. The buyer of the option has the right to force the seller of the option to do whatever the contract specifies within the period of time set by the option. Once the buyer exercises the option, the seller must follow the instructions set by the option.

For example, a call option on a stock gives the option buyer the right to buy a set number of shares at a given price at any time before a specified expiration date. The option seller must sell the stock to the option buyer if the buyer exercises the option.

The buyer of the option has the right to exercise the contract but is under no obligation to do so. Therefore, the option buyer will only exercise the option when it’s smart to do so. In the example above, say that the call option let the buyer pay $100 per share for a given stock. If the stock traded in the market for $50 per share, the option buyer would never exercise the option, because it would be silly to pay $100 under the option for a share the buyer could purchase for $50 on the open market. However, if the share price in the market were $175, then the buyer would exercise the option, since $100 would be a bargain compared to the prevailing share price.

Tax Advantages

The advantage of using retirement funds to invest into foreign exchange and option investments is that, in general, all the income and gains generated by the investment would not be subject to any tax or penalty. Instead of paying tax on the returns associated with the foreign exchange or option transaction, tax is paid at a later date, leaving the investment to grow unhindered. Using a solo 401(k) to make a private placement investment is tax advantageous because the tax on the interest payments can be deferred in the case of a pre-tax 401k or exempted permanently in the case of a Roth 401k.

In addition, solo 401(k) investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

Unrelated Business Taxable Income

Almost every retirement account investment that generates passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.

The UBTI tax is only triggered if:

  • Retirement account uses margin to buy stock
  • Retirement account invests in an active business through a passthrough entity, such as an LLC

The UDFI tax is triggered if:

  • A 401k uses a nonrecourse loan (real estate acquisition financing to purchase real estate)
  • Exemption for 401(k) plans
    • IRC 514(c)(9)

The UBTI & UDFI trigger the same tax rate, which is a maximum of 37% for 2019.

Therefore, if you make foreign exchange or option investments using a solo 401(k) and the underlying investment will not involve an investment into a business operated via a passthrough entity, such as an LLC, will have debt or margin, the UBTI tax rules will likely not be triggered.

You will be assigned to an IRA Financial specialist who will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.

With a Pocket 401(k) for Foreign Currencies/Options, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your 401k funds, as manager of the Checkbook 401k LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account. The Pocket 401(k) allows you to eliminate the delays associated with an 401k custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket 401(k) for Foreign Currencies/Options structure, all income and gains from 401k investments will generally flow back to your 401k LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401k, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the 401k LLC will flow-through to the 401k tax-free!

Regarding options, IRS Publication 598 states that any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. The exclusion applies only if the option is written in connection with the exempt organization’s investment activities. Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business.

You will be assigned to an IRA Financial specialist who will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.

Why Use a Solo 401(k) to Invest in Foreign Currencies/Options?

Unfortunately, none of the major financial institutions will allow you to use 401(k) plan funds to invest in foreign exchange or option investments or essentially anything outside of Wall Street. The reason for this is simple. Banks do not make money when you invest in non-traditional equities, such as private equity or venture capital investments. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Solo 401(k) to invest in foreign exchange or option investments.

What is the Pocket 401k?

IRA Fiancial’s Pocket 401(k) is essentially a solo 401(k) with checkbook control. It is an IRS approved structure that allows one to use his or her retirement funds to make foreign exchange or option investments tax-free and without custodian consent. The Pocket 401(k) for Foreign Currencies/Options involves the establishment of a limited liability company (“LLC”) that is owned by the 401k (care of the 401k custodian) and managed by you or any third-party. As manager of the 401k LLC, you will have control over the 401k assets to make the investments you want and understand – not just investments forced upon you by Wall Street.

How it Works:

  1. Establish the solo 401(k) with IRA Financial Trust & Capital One online though our mobile app.
  2. Your 401k cash/assets can be rolled over to IRA Financial Trust tax-free directly from our mobile app.
  3. The assets will be transferred to a new Solo 401(k) plan checking account with Capital One Bank. Your assigned specialists will help you open a self-directed plan account with Capital One seamlessly and with no wiring fees or minimum balance requirement. Now you can establish a solo 401(k) with checkbook control and not visit a bank or deal with bank opening documentation. Our special partnership with Capital One Bank makes IRA Financial the only self-directed provider that can open a solo 401(k) plan bank account for our clients. This makes the process quick, easy, and cost-effective. As manager of the LLC, you will open a bank account for the LLC at any local bank. IRA Financial will draft an LLC Operating Agreement identifying you as manager of the LLC and the 401k as the sole member.
  4. You, as manager of the LLC, will then have checkbook control over all the assets/funds in the 401k LLC to make the real estate investment.

Since the LLC is owned 100% by an 401k , it will be treated as a disregarded entity for tax purposes. No Federal income tax return is required to be filed and all income and gains will flow back to the 401k without tax.

With a Pocket 401(k) for Foreign Currencies/Options, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your 401k funds, as manager of the Checkbook 401k LLC, simply write a check or wire the funds straight from your Solo 401(k) LLC bank account. The Pocket 401(k) allows you to eliminate the delays associated with an 401k custodian, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Pocket 401(k) for Foreign Currencies/Options structure, all income and gains from 401k investments will generally flow back to your 401k LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the 401k , as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the 401k LLC will flow-through to the 401k tax-free!

2019 Most Popular Foreign Currencies/Options Investments

The following foreign exchange or option investments have been popular with our solo 401(k) clients in 2019:

  • EUR/USD (Euro – US Dollar)
  • USD/JPY (US dollar – Japanese Yen)
  • GBP/USD (British Pound – US Dollar)
  • Covered calls
  • Married put
  • Protective collar
  • Apple options
  • Tesla options

Getting Started

We’re here to help. When you want to use the Pocket 401(k) for foreign currency and options investments, contact IRA Financial directly at 800-472-0646. You can also fill out one of our contact forms to get in touch with a tax specialist.

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