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, HR-10, 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



Rollovers from one Qualified Plan/IRA to another Qualified Plan/IRA can be done to accomplish various tax strategies.
See IRS webpage: Rollovers of Retirement Plan and IRA Distributions
See IRS webpage: IRA FAQs – Rollovers and Roth Conversions
See IRS webpage: In-Plan Rollovers to Designated Roth Accounts
See Nerd Wallet webpage: IRA Rollover Chart
Nice Fidelity article: Rolling after-tax money in 401(k) to a Roth IRA
Nice Vanguard article: Roth conversions
Nice White Coat Investor article: 17 Ways To Screw Up A Backdoor Roth IRA
Nice Investopedia article: Must-Know Rules for Converting Your 401(k) to a Roth IRA


For example: (with very careful planning) before incurring income tax when converting a traditional IRA that holds non-deductible contributions, into a Roth IRA – first rollover all of your IRA accounts, sans the original non-deductible contributions, into a Qualified Plan(s).  And then once all your IRAs are holding nothing but the amount of the original non-deductible contributions, then and only then convert those all into a Roth IRA – the result being zero income tax on the conversion into a Roth.

Caution: It may be that under bankruptcy law, 401(k)s and up to $1,283,025 of IRAs are exempt from creditors. This exemption may only be available to the person who created and funded the accounts. A transfer to a spouse as a result of a divorce may result in losing the exemption. see: Lerbakken, Bankruptcy App. Panel, 8th Cir.


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

Traders in Financial Instruments
have a different computation than most other taxpayers. Establish a one-participant 401(k) Profit Sharing Plan at age 62, for 2020 with your S-Corporation and your maximum contribution is based on the salary you take:

$26,000 Form W-2 = $4,000 P/R tax and a $26,000 401k contribution for a $28,000 tax deduction.
$28,000 Form W-2 = $4,300 P/R tax and a $28,000 401k P/S contribution for a $30,150 tax deduction.
$30,000 Form W-2 = $4,600 P/R tax and a $30,000 401k P/S contribution for a $32,300 tax deduction.
$32,000 Form W-2 = $4,900 P/R tax and a $32,000 401k P/S contribution for a $34,450 tax deduction.
$35,000 Form W-2 = $5,400 P/R tax and a $34,750 401k P/S contribution for a $37,450 tax deduction.
$40,000 Form W-2 = $6,200 P/R tax and a $36,000 401k P/S contribution for a $39,100 tax deduction.

As you can see at $35,000 salary, your NET current-year tax benefit starts to diminish.
For example, The additional $5,000 salary from $35,000 up to $40,000 costs you $800 of P/R tax for a $1,650 tax deduction. So it actually costs you money after $35,000.


Establish a one-participant 401(k) Profit Sharing Plan at age 62, for 2020 with your self-employment business at and your maximum contribution is based on the S/E earned income you have:

$26,000 SE income = $3,978 payroll tax and a $24,164 401k P/S contribution for a $26,153 tax deduction.
$28,000 SE income = $4,284 payroll tax and a $26,022 401k P/S contribution for a $28,164 tax deduction.
$30,000 SE income = $4,590 payroll tax and a $27,880 401k P/S contribution for a $30,175 tax deduction.
$32,000 SE income = $4,896 payroll tax and a $29,740 401k P/S contribution for a $32,188 tax deduction.
$35,000 SE income = $5,355 payroll tax and a $32,505 401k P/S contribution for a $35,182 tax deduction.
$40,000 SE income = $6,120 payroll tax and a $33,435 401k P/S contribution for a $36,495 tax deduction.

As you can see at just under $35,000 SE income, your NET current-year tax benefit starts to diminish.
For example, the additional $5,000 SE income from $35,000 up to $40,000 costs you $765 of SE tax for a $1,313 tax deduction. So it actually costs you money after just under $35,000.

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)).

  • 2023 §401(k) limits: $22,500 under age 50 – and $30,000 over age 49
  • 2022 §401(k) limits: $20,500 under age 50 – and $27,000 over age 49
  • 2021 §401(k) limits: $19,500 under age 50 – and $26,000 over age 49
  • 2020 §401(k) limits: $19,500 under age 50 – and $26,000 over age 49
  • 2019 §401(k) limits: $19,000 under age 50 – and $25,000 over age 49
  • 2018 §401(k) limits: $18,500 under age 50 – and $24,500 over age 49
  • 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

Qualified Plans (defined-benefit, and defined-contribution), a/k/a HR-10 plans which were f/k/a Keogh plans (as sponsored by Rep. Eugene Keogh with the Self-Employed Individuals Tax Retirement Act of 1962 until the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA))

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:

  • 2023 §415(c)(1)(A) limits: $66,000 and if coupled with a SE401(k) then up to $73,500 over age 49
  • 2023 §415(c)(1)(A) limits: $61,000 and if coupled with a SE401(k) then up to $67,500 over age 49
  • 2021 §415(c)(1)(A) limits: $58,000 and if coupled with a SE401(k) then up to $64,500 over age 49
  • 2020 §415(c)(1)(A) limits: $57,000 and if coupled with a SE401(k) then up to $63,500 over age 49
  • 2019 §415(c)(1)(A) limits: $56,000 and if coupled with a SE401(k) then up to $62,000 over age 49
  • 2018 §415(c)(1)(A) limits: $55,000 and if coupled with a SE401(k) then up to $61,000 over age 49
  • 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.

  • 2023 SIMPLE limits: $15,500 under age 50 – and $19,000 over age 49 (plus 1% to 3% employer match)
  • 2022 SIMPLE limits: $14,000 under age 50 – and $17,000 over age 49 (plus 1% to 3% employer match)
  • 2021 SIMPLE limits: $13,500 under age 50 – and $16,500 over age 49 (plus 1% to 3% employer match)
  • 2020 SIMPLE limits: $13,500 under age 50 – and $16,500 over age 49 (plus 1% to 3% employer match)
  • 2019 SIMPLE limits: $13,000 under age 50 – and $16,000 over age 49 (plus 1% to 3% employer match)
  • 2018 SIMPLE limits: $12,500 under age 50 – and $15,500 over age 49 (plus 1% to 3% employer match)
  • 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.

  • 2023 IRA limits: $6,500 under age 50 – and $7,500 over age 49
  • 2022 IRA limits: $6,000 under age 50 – and $7,000 over age 49
  • 2021 IRA limits: $6,000 under age 50 – and $7,000 over age 49
  • 2020 IRA limits: $6,000 under age 50 – and $7,000 over age 49
  • 2019 IRA limits: $6,000 under age 50 – and $7,000 over age 49
  • 2018 IRA limits: $5,500 under age 50 – and $6,500 over age 49
  • 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

 

  • 2023 IRA Phase-out range: Single $73,000 to $83,000 – MFJ $116,000 to $136,000 – MFS $0 to $10,000 – Spousal $218,000 to $228,000
  • 2022 IRA Phase-out range: Single $68,000 to $78,000 – MFJ $109,000 to $129,000 – MFS $0 to $10,000 – Spousal $204,000 to $214,000
  • 2021 IRA Phase-out range: Single $66,000 to $76,000 – MFJ $105,000 to $125,000 – MFS $0 to $10,000 – Spousal $198,000 to $208,000
  • 2020 IRA Phase-out range: Single $65,000 to $75,000 – MFJ $104,000 to $124,000 – MFS $0 to $10,000 – Spousal $196,000 to $206,000
  • 2019 IRA Phase-out range: Single $64,000 to $74,000 – MFJ $103,000 to $123,000 – MFS $0 to $10,000 – Spousal $193,000 to $203,000
  • 2018 IRA Phase-out range: Single $63,000 to $73,000 – MFJ $101,000 to $121,000 – MFS $0 to $10,000 – Spousal $189,000 to $199,000
  • 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

 

  • 2023 Roth IRA Phase-out range: Single&HOH $138,000 to $153,000 – MFJ $218,000 to $228,000 – MFS $0 to $10,000
  • 2022 Roth IRA Phase-out range: Single&HOH $129,000 to $144,000 – MFJ $204,000 to $214,000 – MFS $0 to $10,000
  • 2021 Roth IRA Phase-out range: Single&HOH $125,000 to $140,000 – MFJ $198,000 to $208,000 – MFS $0 to $10,000
  • 2020 Roth IRA Phase-out range: Single&HOH $124,000 to $139,000 – MFJ $196,000 to $206,000 – MFS $0 to $10,000
  • 2019 Roth IRA Phase-out range: Single&HOH $122,000 to $137,000 – MFJ $193,000 to $203,000 – MFS $0 to $10,000
  • 2018 Roth IRA Phase-out range: Single&HOH $120,000 to $135,000 – MFJ $189,000 to $199,000 – MFS $0 to $10,000
  • 2017 Roth IRA Phase-out range: Single&HOH $118,000 to $133,000 – MFJ $186,000 to $196,000 – MFS $0 to $10,000
  • 2016 Roth IRA Phase-out range: Single&HOH $117,000 to $132,000 – MFJ $184,000 to $194,000 – MFS $0 to $10,000
  • 2015 Roth IRA Phase-out range: Single&HOH $116,000 to $131,000 – MFJ $183,000 to $193,000 – MFS $0 to $10,000
  • 2014 Roth IRA Phase-out range: Single&HOH $114,000 to $129,000 – MFJ $181,000 to $191,000 – MFS $0 to $10,000
  • 2013 Roth IRA Phase-out range: Single&HOH $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

 

Maximum monthly Social Security benefits paid depends on your retirement age.

  • for 2023 If retired at age 62 $2,572,  If retired at full retirement age $3,506,  If retired at age 70 $4,555, average $1,827
  • for 2022 If retired at age 62 $2,364,  If retired at full retirement age $3,340 (or $3,345),  If retired at age 70 $4,194, average $1,681
  • for 2021 If retired at age 62 $2,324,  If retired at full retirement age $3,113,  If retired at age 70 $3,895, average $1,565
  • for 2020 If retired at age 62 $2,265,  If retired at full retirement age $3,011,  If retired at age 70 $3,790, average  $1,523
  • for 2019 If retired at age 62 $2,009,  If retired at full retirement age $2,861,  If retired at age 70 $3,770 average  $1,479
  • for 2018 If retired at age 62 $2,158,  If retired at full retirement age $2,788,  If retired at age 70 $3,698 average  $1,422
  • for 2017 If retired at age 62 $2,153,  If retired at full retirement age $2,687,  If retired at age 70 $3,538 average  $1,377
  • for 2016 If retired at age 62 $2,103,  If retired at full retirement age $2,639,  If retired at age 70 $3,576 average  $1,355
  • for 2015 If retired at age 62 $2,025,  If retired at full retirement age $2,663,  If retired at age 70 $3,501 average  $1,328
  • for 2014 If retired at age 62 $1,992,  If retired at full retirement age $2,642,  If retired at age 70 $3,425 average  $1,306
  • for 2013 If retired at age 62 $1,923,  If retired at full retirement age $2,533,  If retired at age 70 $3,350 average  $1,275

https://www.ssa.gov/oact/cola/examplemax.html

 

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

      • 2023 §223 HSA limits: Self $3,850 under age 55 and $4,850 over age 54 – Family $7,750 under age 55 and $8,750 over age 54*
      • 2022 §223 HSA limits: Self $3,650 under age 55 and $4,650 over age 54 – Family $7,300 under age 55 and $8,300 over age 54*
      • 2021 §223 HSA limits: Self $3,600 under age 55 and $4,600 over age 54 – Family $7,200 under age 55 and $8,200 over age 54*
      • 2020 §223 HSA limits: Self $3,550 under age 55 and $4,550 over age 54 – Family $7,100 under age 55 and $8,100 over age 54*
      • 2019 §223 HSA limits: Self $3,500 under age 55 and $4,500 over age 54 – Family $7,000 under age 55 and $8,000 over age 54*
      • 2018 §223 HSA limits: Self $3,450 under age 55 and $4,450 over age 54 – Family $6,900 under age 55 and $7,900 over age 54*
      • 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