Learn the benefits of setting up a retirement plan for yourself as a full-time trader from trader tax expert Robert Green.
My guest today is Robert Green, an expert on taxes for traders and a CPA. We’re talking about retirement plans for traders and investors so, Robert, talk about some various choices I have in terms of retirement plan.
Well, the best plan for traders is an individual 401(k) plan. You need to be a small business with trader tax status. It combines the 401(k) elected deferral that is 100% deductible, that is where the tax juice is. You have to pay SE, self-employment taxes, on the fee that you pay yourself from your entity, so if you pay a fee of $18,000, you pay 15.3%, 2% less if there is the payroll tax cut extended. That is the cost. That goes towards your retirement, Medicare, Social Security, that is a good tax. But, you can save taxes anywhere from 23% to 40%, futures 23%, 40% if it is ordinary, 35% rates plus state, so you are saving taxes at a much higher percentage income taxes than it is costing you in SE taxes. So, you put $2,000 to $17,000 or more in your pocket net.
Let’s talk about setting it up. What do I have to do before the end of the year to set it up but not fund it or fund it, what do I have to do?
Exactly, Tim. If you want an individual 401(k) plan, you must set it up before the end of the year. Just go to one of the major brokers, say you want an individual 401(k) established, spend a half hour, do the paperwork. You don’t have to put a dime into it until you fund it for your 2012 tax-deductible contribution up until the due date of your tax return, which could be October 15, 2013. You have plenty of time to make the money to put in the plan to get a 2012 tax deduction.
Let’s talk about IRAs as another example, Roth IRAs. Give us some examples there.
Well, a Roth IRA is great because it is tax-free for life. A regular retirement plan 401(k), individual 401(k), SEP IRA, IRA, you put the money away, you get a tax deduction, and then you get tax-free buildup until you take the money out in retirement, and you must take it out by age 70-1/2, you may take it out at 59-1/2. That is ordinary income. Tax rates could go up a lot, federal and state, so it is a temporary benefit, a powerful benefit but temporary. The Roth is a permanent benefit. If you convert your regular IRA to a Roth IRA in 2012, because maybe you think the Bush-era tax cuts expire, your rates are skyrocketing, check out of the tax restaurant now, eat free for the rest of your life tax-free. If it doesn’t work out for him, Tim, you can re-characterize it. You can reverse it next year on the Roth IRA conversion.
Do I have to convert it by December 31?
Yes. Yes, you need to so you are going to spend some time with your broker and your accountant, that is the only downside, a little cost with your accountant, a little time with the broker, do it all, and let’s say the money, you converted $500,000, but you lose a lot of money next year in that account. Then you say, why did I pay taxes on the money I lost. That was a mistake. No problem. You do a re-characterization and you reverse it as if it never happened.
How about, at that time of that conversion, do I pay taxes on what is already in there or?
Well, if you do the conversion, you are going to pay the taxes for April 15. You are not going to file until October 15, which is when you can do the re-characterization, and then you will have an overpayment credit.
Got it. Robert, I know you’ve got a ton of information about this kind of thing on your website. Give that to us.