Retirement Plan Options

Normally traders are prohibited from having a retirement plan based on their income (IRC §475(f)(1)(D) and IRC §401(c)). But with a little foresight and planning traders may be able to contribute annually to IRA, 401(k), Keogh, SEP, SIMPLE, Roth and Profit Sharing Plans . Usually this means forming a separate trading entity, such as a partnership, LLC or corporation to be established first in order to properly transition the trading income into “earned income” (all retirement plan require earned income which normally requires the payment of Social Security/Medicare taxes). Once the retirement plan is established you can make annual contributions of some portion of your income.

The discussion on this webpage covers defined contribution plans, meaning that the dollar amount contributed into the plan each year is a certain defined percentage of earnings.   Higher current deductions are available with a more complex defined benefit plan or cash balance plan where the dollar amount contributed into the plan each year is computed by an actuary based on the ages of the participants as well as the earnings.
There are restrictions when you may have more than one business and when you have employees, see (IRC §414(c))

The retirement plan can be:

  • a deductible, tax-deferred plan, or
  •  a non-deductible, income tax-free Roth plan


The money can be used by the plan:

  • in a normal fashion “cash-account” at a brokerage of your choice. The problem with this is most brokers do not allow retirement plans to have margin accounts, and therefore the three-day settlement rule limits the amount of day trading before the Reg T free-riding rule puts the account on hold. Shorting stocks is also normally prohibited. or…
  • in a LLC that you control that in turn opens a margin account at a brokerage of your choice. The LLC can then short stocks and can buy and sell without regard to the three day settlement free riding rule, assuming that the broker allows the LLC to have a margin account (which is usually the case since the account is in the name of an LLC, not in the name of a retirement plan).
  • to lend out. Certain plans allow you to borrow the money back out and charge you a fair interest rate
  • to purchase real estate with non-recourse debt; as long as there’s no related party use

Quick look-ups:

Self-employed 401(k) generally must be established either prior to December 31st of the current year or by the business tax year-end and funded either by January 15th (per DOL) or funded by the extended due date of that year’s business tax return (generally, per IRC §404(a)(6)).

  • 2017 §401(k) limits: $18,000 under age 50 and $24,000 over age 49
  • 2016 §401(k) limits: $18,000 under age 50 and $24,000 over age 49
  • 2015 §401(k) limits: $18,000 under age 50 and $24,000 over age 49
  • 2014 §401(k) limits: $17,500 under age 50 and $23,000 over age 49
  • 2013 §401(k) limits: $17,500 under age 50 and $23,000 over age 49

https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview


SEP-IRA & PROFIT SHARING (including most other qualified retirement plans / defined contribution plans)
SEP plans generally must be established and funded by the extended due date of the business tax return in the following year.
Profit Sharing plans generally must be established by the business tax year-end and funded by the extended due date of the business tax return.
Total maximum combined limits including any self-employed 401(k) contribution:

  • 2017 §415(c)(1)(A) limits: $54,000 and if coupled with a SE401(k) then up to $60,000 over age 49
  • 2016 §415(c)(1)(A) limits: $53,000 and if coupled with a SE401(k) then up to $59,000 over age 49
  • 2015 §415(c)(1)(A) limits: $53,000 and if coupled with a SE401(k) then up to $59,000 over age 49
  • 2014 §415(c)(1)(A) limits: $52,000 and if coupled with a SE401(k) then up to $57,500 over age 49
  • 2013 §415(c)(1)(A) limits: $51,000 and if coupled with a SE401(k) then up to $56,500 over age 49

http://www.irs.gov/uac/2013-Pension-Plan-Limitations
http://www.dol.gov/ebsa/publications/SEPPlans.html
Self-Employed Contribution Calculator
https://www.fidelity.com/retirement-ira/small-business/sep-ira


SIMPLE IRA generally must be established prior to October 1st of the current year,
and funded by the extended due date of that year’s business tax return.

  • 2017 SIMPLE limits: $12,500 under age 50 and $15,500 over age 49 (plus 1% to 3% employer match)
  • 2016 SIMPLE limits: $12,500 under age 50 and $15,500 over age 49 (plus 1% to 3% employer match)
  • 2015 SIMPLE limits: $12,500 under age 50 and $15,500 over age 49 (plus 1% to 3% employer match)
  • 2014 SIMPLE limits: $12,000 under age 50 and $14,500 over age 49 (plus 1% to 3% employer match)
  • 2013 SIMPLE limits: $12,000 under age 50 and $14,500 over age 49 (plus 1% to 3% employer match)

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-SIMPLE-IRA-Contribution-Limits
https://www.fidelity.com/retirement-ira/small-business/simple-ira/overview


IRA (Roth or Traditional) generally must be established and funded by April 15th of the following year.

  • 2017 IRA limits: $5,500 under age 50 and $6,500 over age 49
  • 2016 IRA limits: $5,500 under age 50 and $6,500 over age 49
  • 2015 IRA limits: $5,500 under age 50 and $6,500 over age 49
  • 2014 IRA limits: $5,500 under age 50 and $6,500 over age 49
  • 2013 IRA limits: $5,500 under age 50 and $6,500 over age 49

 

  • 2017 IRA Phase-out range: Single $62,000 to $72,000 MFJ $99,000 to $119,000 MFS $0 to $10,000 Spousal $186,000 to $196,000
  • 2016 IRA Phase-out range: Single $61,000 to $71,000 MFJ $98,000 to $118,000 MFS $0 to $10,000 Spousal $184,000 to $194,000
  • 2015 IRA Phase-out range: Single $61,000 to $71,000 MFJ $98,000 to $118,000 MFS $0 to $10,000 Spousal $183,000 to $193,000
  • 2014 IRA Phase-out range: Single $60,000 to $70,000 MFJ $96,000 to $116,000 MFS $0 to $10,000 Spousal $181,000 to $191,000
  • 2013 IRA Phase-out range: Single $59,000 to $69,000 MFJ $95,000 to $115,000 MFS $0 to $10,000 Spousal $178,000 to $188,000

 

  • 2017 Roth IRA Phase-out range: Single $118,000 to $133,000 MFJ $186,000 to $196,000 MFS $0 to $10,000
  • 2016 Roth IRA Phase-out range: Single $117,000 to $132,000 MFJ $184,000 to $194,000 MFS $0 to $10,000
  • 2015 Roth IRA Phase-out range: Single $116,000 to $131,000 MFJ $183,000 to $193,000 MFS $0 to $10,000
  • 2014 Roth IRA Phase-out range: Single $114,000 to $129,000 MFJ $181,000 to $191,000 MFS $0 to $10,000
  • 2013 Roth IRA Phase-out range: Single $112,000 to $127,000 MFJ $178,000 to $188,000 MFS $0 to $10,000


Starting 2010 Roth Conversion – allowed – there is no income limitation. Special one-time election – the tax can be elected to be paid in 2011 & 2012 rather than in 2010
2005 to 2009 No Roth conversion allowed if AGI exceeded $100,000


HSA (very) generally must be established by December 1st and funded by April 15th of the following year.

  • 2017 §223 HSA limits: Self $3,400 under age 55 and $4,400 over age 54 Family $6,750 under age 55 and $7,750 over age 54*
  • 2016 §223 HSA limits: Self $3,350 under age 55 and $4,350 over age 54 Family $6,750 under age 55 and $7,750 over age 54*
  • 2015 §223 HSA limits: Self $3,350 under age 55 and $4,350 over age 54 Family $6,650 under age 55 and $7,650 over age 54*
  • 2014 §223 HSA limits: Self $3,300 under age 55 and $4,300 over age 54 Family $6,550 under age 55 and $7,550 over age 54*
  • 2013 §223 HSA limits: Self $3,250 under age 55 and $4,250 over age 54 Family $6,450 under age 55 and $7,450 over age 54*
    * assumes that only one spouse has the HSA

http://www.irs.gov/publications/p969/ar01.html

https://www.hsaresources.com/pdf/Turning_65.pdf


Other limits and information – listed here:
Calhoun Law Group, P.C.
QB alance.com
University of Minnesota
IRS COLA Increases
DOL Consumer Publications
SEP vs. SIMPLE vs. Self-employed 401(k)


The tax free Roth 401(k) was made available on January 1, 2006 at several retail brokers, including thinkorswim / TD Ameritrade (done properly, in our opinion, using a two-account Ascensus prototype) and several other firms using a tax-deferred/tax-free comingled approach.


FICA wage base increases over the years