Incorporation questions

Discussion in 'Professional Trading' started by nravo, Aug 25, 2006.

  1. nravo


    Let's say I'm trading out of my garage, and in addition to, say, being a college professor (can't beat the hours), I'm pulling in 40k-50k a year almost exclusively in options premium, varieity of types, equity, index, futures. If I incorporate, can I park my profits, short-term, in an IRA? If so, what kind of IRA and how muchg can I put in there? I assume I can write off all sorts of garage-related trading expenses, too, no? Any reason not to do this? Does it matter what state? What kind of corporation. I live in Florida.
  2. As an investor those $40K in option premiums are probably short-term capital gains. You can not base an IRA contribution on that. But yes possibly if you were to form an entity and the entity earned those premiums and then the entity paid you for the work you do, then you would have "earned income." IRAs are based on earned income. But a side effect of this in your case would be a lot of portfolio deductions equal to the amount of earned income, which is not necessarily the most tax efficient way to go. But if you have your reasons, yes you can probably have the IRA.

    As to can you actually contribute to the IRA and if the money could stay in the IRA for a relatively short time, that would depend on other factors such as any other retirement plans you have, your age, and so on.

    You might also consider a 401(k) or profit sharing or other plan rather than or in addition to an IRA.

    The type of entity and where to set it up would depend on your personal siltation.

    Garage expenses? If they were ordinary and necessary for the earned income they might be somewhat deductible. If they were for the entity's option writing itself, then it would probably be less likely to be a viable write off.
  3. nravo


    How much can I contribute to each kind of plan? Any caveats?
  4. If you type into Google:

    trader ira 401k limits

    you'll see a web page giving the various limits