I think the first $15,000 contributed to a mini or solo 401k makes a lot of sense. You can contribute $1 for every $1 of SE income. Tax-free compounding will make up for the SE taxes, as long as you're earning decent investment returns over at least a decade or two. As for "profit sharing," which allows you to contribute up to $42k to your solo 401k, I don't think it makes sense. You have to pay SE tax on $1 for every $0.25 contribution. That's pretty hard to justify even with the beneficial treatment of investment returns. If your spouse can be considered an employee of your business, you can each contribute $15k to the plan, with only $30k of total SE income. This is allowed even if one or both of you has another employer with another 401k plan, as long as each of you contribute no more than the $42k individual limit. Keep in mind that, in theory, the SE taxes are a transfer payment that benefit you when you retire. So it might not be money down the drain. If you haven't already maxed out your Social Security lifetime income, the SE taxes you pay on earned income will increase your SS benefit. That is, assuming SS isn't bankrupt by the time you retire. Martin
Naturally, capital gains aren't subject to SE taxes. The situation here is using an entity to pay yourself a salary, intentionally converting capital gains to earned income which is eligible for retirement accounts. Unfortunately it's also eligible for SE taxes. Martin
You're daytrading (or swing trading) your retirement account? Can you do that without paying taxes now? I think you may have changed my mind. So what do you do, stop after you make $150K for the year in your regular account, and then trade your retirement account for the rest of the year? Sounds pretty sweet.
OK, I guess the problem is that you can only fund a 401 k out of earned income, but then you have a problem with corporate level taxes on top of what you pay as an "employee." Typically, you would just pass through everything, and in fact you don;t even need an IRS id number for the LLC, you just use your individual SS number. But then I think the income would retain its cpa gain character. Maybe I am wrong about that. I am not an accountant and have not worked through all the ramifications of this, but I just caution that there are a lot of wrinkles to it. No doubt you and your accountant have done so, but I amjust trying to say that this area can be deceptively tricky and using someone with a lot of experience in it is worth the cost.
OK, here's a list of questions I came up with to ask my accountant. I'm not necessarily asking for answers here; I just want to have something legible in front of me when I talk to him. 1) Will I have to pay the corporate tax rate, or the individual tax rate? If I pay the corporate tax rate, is that on my entire income? Do I have to set up an LLC to avoid corporate rates? 2) Is all of my income subject to medicare tax? If I make $500K, do I pay 2.9% of all of that? (I would assume that I only pay social security tax on the first $94K.) 3) Do I pay the self employment taxes twice, as an employer and employee? Would I be paying 6.2% or 12.4% for social security? 1.45% or 2.9% for medicare? 4) Are self employment taxes that I pay considered a deduction from my federal income taxes? 5a) Can I trade or daytrade my retirement account? b) Am I only allowed to trade a cash account? No margin or shorting? c) Am I restricted to trading a certain percentage of my retirement account, eg 30%? d) Would I still be restricted by the $25K pattern daytrader rule? In other words, would I be unable to trade my retirement account until it was over $83K, for example, if you can only trade 30% of your retirement account? e) If the maximum allowed for trading is 30%, for example, how is that figured? Let's say I have $100K in my retirement at the beginning of the year. Can I declare $30K of that money as daytrading money that year, and just trade that all year? Or is the 30% figure constantly changing? f) Let's say again that I have $100K in a retirement account, and I'm allowed to daytrade with $30K. And I turn that into $500K in one year. Is all of that income tax deferred? 6) How does the catch-up contribution work? Do I have to be a certain age? Is this a one-time deal? 7) Let's say at age 59 1/2 I start taking distributions of $100K per year, and have no other income. Would my taxable income be $100K each year? 8) Do I get a benefit by paying social security taxes that I wouldn't get as a trader who doesn't pay them? Am I eligible for more social security benefits when I retire? Does it depend on how many years I paid them previously? 9) What if for some reason I change my mind about having an entity set up at some point in the future? Since a corporation (I believe that's what we're talking about) exists in perpetuity, am I stuck with it as long as I trade? 10) What brokers will allow me to trade a retirement account? Can I have a retirement trading account, in addition to my regular trading account, with the same broker? (Not necessarily a question for the accountant)
I see that you're starting with just enough knowledge to be dangerous You might consider first getting up to speed by Googling [ trader tax book ] and [ day trader retirement ] where for a few bucks you will have answers to most all of those questions.
11) Can I arbitrarily (and legally) trade either my retirement or my regular account whenever I wish? How practical would that be? How would I divy up the trading expenses for tax purposes? Once I get to a certain profit level (about $150K) in my regular account, can I just stop and trade only my retirement account the rest of the year? 12) What is the basis for my income, from which the percentage is computed that I'm allowed to put into retirement? Is it before or after deductions?
I don't know if this was mentioned before or not...but you can have a roth account within the 401k now...no income thresholds... what does that mean? You can pay taxes on the 15k salary deferal today and get tax-free growth on all of those assets!!! Deduct the profit sharing component and defer the taxes naturally... ciao