Retirement Solutions

Save thousands in taxes with a high-deductible retirement plan deduction and grow your retirement funds tax-free until retirement.

Traders use retirement plans in several ways. You can trade in the retirement plan, build it up with annual contributions, borrow money from a qualified plan (not an IRA) to finance a trading business, and convert it to a Roth IRA for permanent tax-free build-up. There are plenty of pitfalls to avoid like early withdrawals subject to ordinary income tax rates and 10% excise tax penalties, and penalties on prohibited transactions.

Earned income is needed

Taxpayers need “earned income” to contribute to retirement plans. TTS traders use an S-Corp to pay officer compensation to create earned income to make retirement plan contributions.

Solo 401(k) plan

Generally, the best retirement plan for business traders is a defined-contribution Solo 401(k) for S-Corps established on the entity level in connection with officer compensation (payroll). This plan is only allowed with TTS (it’s not for investment companies). It combines a 100% deductible “elective deferral” (ED) contribution of $19,000 for 2019 and $19,500 for 2020 with a 25% deductible profit-sharing plan contribution (PSP) up to a maximum $37,000 for 2019 and $37,500 for 2020. There is also an ED “catch-up provision” of $6,000 for 2019 and $6,500 for 2020 for taxpayers age 50 and over. Together, the maximum tax-deductible contribution is $56,000 for 2019 and $57,000 for 2020, and including the catch-up provision it’s $62,000 for 2019 and $63,500 for 2020.

Roth retirement accounts and conversions

A Roth retirement plan is different from a traditional plan. The Roth has permanent tax savings on growth and contributions, whereas the conventional retirement plan only has deferral with taxes owed on distributions in retirement. Distributions from a Roth plan are tax-free unless you take an early withdrawal that exceeds your non-deductible contributions to it over the years (keep accurate records).

Consider annual contributions to a Roth IRA. The rules are similar to traditional IRA contributions. Also, consider a Roth IRA conversion before year-end to maximize the use of lower tax brackets, offset business losses, and utilize itemized or standard deductions. If a 2019 converted Roth account drops significantly in value in 2020, a taxpayer can no longer reverse the Roth conversion.

For more information, see Green’s Trader Tax Guide, Chapter 8, Retirement Plans. 

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