TraderSavvy
January 3, 2007

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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.

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 withdrawn from your Roth IRA come out tax-free.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.

Conclusion
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.

Equities Magazine
January 2007

One of my resolutions for 2007 is to not get annoyed when people ask me, “What’s the deal with the Euro?” This is because I think a more important and ultimately revealing question is, “What’s up with the U.S. dollar?”

Despite the fact that the USD has been weakening steadily for the better part of 18 months, analysts only really started talking about stabilization in September. The bubble of optimism was punctured in late November, as Thanksgiving weekend brought dollar weakness and the highest EUR/USD price since March 2005. Add into the mix a strong Non-Farm Payroll report on December 8, and you’ve got a veritable turkey, which caused movement of over 350 pips ( point in the currency trading arena) in less than a week. That one week stunned experts and emptied trading accounts.

Recently, in response to the subsequent Euro strength/dollar weakness, European Central Bank President Jean-Claude Trichet indicated he was “closely monitoring developments,” a phrase which in the past has presaged rate increases. Analysts speculated that a pause in rate hikes would have weakened the Euro, but those speculations were diffused by Trichet’s hawkish statements.

Since early December the EUR/USD has begun to establish a comfortable trading range that is well above what was seen in 2006.

So what does 2007 hold for the USD?

Industry analysts point to many factors while trying to project the future of the dollar and the economy for this year. Some of the interesting ones I have heard in recent weeks include:

- The second half of a presidential cycle has strong tendencies to be bullish.
- If the current U.S. administration pulls money out of Iraq it will be redirected back into the U.S. economy.
- We are currently experiencing a long period of economic expansion in the United States. All long U.S. economic cycles have been followed by recession or depression, with calendar years ending in “7” or “0” having the highest probability of being down years.

Well, the good news is there is some sort of consensus between economists with regards to this year’s economic forecast. The main negative factor for the U.S. economy seems likely to be the housing slump, and the Fed is expected to focus closely on labor and inflation numbers. But the biggest wildcard in this calculation will be the value of the USD. If banks, foreign investors and traders sell the USD the U.S. economy will likely take a solid beating. For instance, take into consideration that the U.S. dollar has been devalued almost 30 percent against other foreign currencies in the recent past, meaning countries like China have lost almost $300 billion simply by holding U.S. dollars in reserve. The U.S. has made no indication that it plans to reduce deficit spending or pay down any existing debt without printing money to pay it off. Should China decide to employ an aggressive sell-off of U.S. dollars it is likely many other countries will follow suit.

Not as bleak as it looks…

Despite the weakening housing market, the employment climate seems to be holding steady. The jobless rate reached a five year low of 4.4 percent in October 2006. While this doesn’t promote optimism in some analysts, it will likely be one of the key numbers influencing the Fed’s decision in lowering interest rates.

Fed Chairman Ben Bernanke has already indicated that rising labor costs are also on his radar this year. Some economists speculate that rising wages could be the latest source of inflation. While no one disputes that inflation is a concern for the Fed, there are opposing views on the subject. For instance, another group of analysts believe that inflation will ease in 2007. This has lead to widely differing GDP forecasts from analysts, but most agree that the beginning of 2007 will be the most challenging half.

On a brighter note, many analysts are quick to point out healthy numbers in business investments and exports. Right now, there appears to be sufficient inflow from foreign sources to fund the U.S. deficit. And it has also been noted that the economies in the G7 countries are averaging approximately 2 to 3% GDP, which points to equalization of the growth differential.

And perhaps the most discussed bright spot is the strength of the stock market, which has generally withstood the cooling housing market and other dollar strains.

So, while you may still wonder about and watch the Euro, to find out what is happening to any currency, find out what it up with the dollar.