Ever have a “friend” whose house was broken into and then realized he or she did not have replacement insurance? Or one who had a tree fall on his or her car resulting in damage that ever so slightly exceeded the ever-so-large deductible?

Usually that “friend” is the exception not the rule, as Americans, for the most part, do insure their cars, homes, and even their lives. And, of course, when it comes to our health, we have no choice – whether you love it or loathe it, Obamacare has made it mandatory.

Still the biggest asset most Americans leave uninsured is their retirement portfolios, specifically their IRAs.

When looking at your IRA, you need to analyze the risk. Specifically, if your portfolio is heavily weighted in stocks there are multiple types of risk including:

1. a specific company having a problem;

2. a sector having a problem, and;

3. the overall market having a problem.

Diversification can help, but there are other ways to insure your retirement accounts, including trading options to insure your portfolio. For non-traders, options have often been given the undeserved reputation as being only vehicles for speculation. But, for those with any market savvy, you know that while it is certainly possible to speculate with options, it is just as easy to speculate trading penny stocks.

A variety of option strategies can be employed in an IRA account as insurance including a collar.

A collar (long stock, long puts and short calls in equal quantity) is a strategy that combines a covered call and a protective put. Consider establishing a collar if you are primarily concerned with protecting a position at minimal expense. A collar provides temporary protection against a downturn in the equity position, but it also removes all upside potential above the call strike price. Because it is generally unwise to hold a long stock position if you think the long-term prospects are poor, you should only consider employing this strategy if you feel the long-term prospects of your stock are still favorable.

Probably the biggest benefit to trading a collar is that it can often be done for little or a relatively small amount of capital. This occurs because the proceeds received from the sale of the covered calls can be used to finance some or all of the purchase costs of the protective puts. In some instances, you may even be able to receive a net credit. Unlike many other option strategies, collars tend to get less expensive as you go farther out into the future. The most common use of a collar is when you want to protect an unrealized profit, but you are not yet ready to sell the position. A properly structured collar can help protect against a downturn while attempting to postpone capital gains obligations.

Putting strategies to work like collars are beneficial to use in a traditional IRA because taxes on any capital gains earned are typically deferred. Assuming profitability, by retaining all of the profits in the account while you are still in your working years, you may be able to accumulate assets more quickly and grow your account faster. Keep in mind, though, that you will be taxed (at ordinary income tax rates) on all distributions and profits when you withdraw them after you retire, so you won’t get the benefit of a lower capital gains tax rate, regardless of how long you may have owned the securities.

By contrast in a Roth IRA, contributions are made with after-tax dollars, and the earnings are generally tax-free at the time you withdraw them from the account. Which one is most beneficial to you will depend on a number of factors, such as your income, current and expected tax bracket, level of contributions, and how many years you have until retirement.

#####

For more a free whitepaper – Five Reasons Why You Should Be Trading In Your IRA, click here.