Online Trading Academy Lessons from the Pros 05/3/05: Attractive 401(k) Plans Await Traders Who Think Business

Traders Accounting: Attractive 401(k) Plans Await Traders Who Think Business

Attractive 401(k) Plans Await Traders Who Think Business
By Jim Forrester, CPA

Traders Accounting provides tax consulting, entity formation, tax preparation and 401(k) services that help you efficiently establish and maintain your trading business. They teach you the IRS rules that allow you, as a trader, to deduct the widest range of business expenses and fringe benefits available to business owners. The goal is to help you lower your taxes, save you time, and maximize the benefits of your trading business. Visit their web site at: www.tradersaccounting.com

Attractive 401(k) Plans Await Traders Who Think Business

One of the most attractive aspects of trading as a business is the ability to set up your own pension fund, commonly known as a 401(k). Businesses large and small have used 401(k) plans for years, often with a company match, to attract and retain valuable employees while enjoying certain tax benefits.

The advantage of a 401(k) plan a trader is, as both employer and employee, you realize significant tax savings and retain full control over how your
contributions are invested.

Without a trading business, your retirement options are largely limited to such vehicles as Individual Retirement Accounts, Roth IRAs, SEP IRAs, SIMPLE IRAs and mini-401(k) plans. They're all solid, tax-advantaged options with some investment upside, but your contributions remain largely unavailable (with a few exceptions) until you reach retirement age.

But as your own business, you are allowed to make active use of your 401(k) plan to grow your trading business while you enjoy tax subsidies and build toward a comfortable retirement. Think of it as an IRA on steroids, with significantly more leverage, flexibility and tax advantages than those available to non-entity traders.

What's the 411 on 401(k)? Here are six ways you win when you have Traders Accounting setup your self-directed plan with you as the custodian.

Borrowing

Want to dramatically increase your trading reserves? Borrow it from yourself. With a 401(k), you can borrow up to $50,000 or 50% of the balance in your account, whichever is less, to beef up your trading reserves or to use for any other purpose. You can't do that with an IRA; loans from IRAs are considered "prohibited transactions." What's more, a loan against your 401(k) comes with favorable repayment terms - and you pay the interest to yourself, not a bank.

Tax Subsidies

As an employee, you are subject to tax only when amounts are actually distributed from the 401(k). As the employer , you can deduct your 401(k) contributions on your federal income tax and may enjoy a similar deduction on your state income tax as well. All 401(k) contributions accumulate tax-deferred.

Avoid FICA

As a business, you would pay 15.3% FICA (Federal Insurance Contribution Tax) into Social Security on employee and employer contributions. But because you are your own corporation, you can avoid FICA. Here's how: Say your business pays you $50,000 and an additional $1,000 bonus. If you take the bonus as salary, you would only net $923.50 ($1,000 less 15.3% FICA). But if, as a business, you contribute that bonus to your 401(k), you would pay no FICA tax, either when the contribution is made or when it is distributed.

Tax Shelter

As both business and individual contributor to your 401(k), you can shelter up to $42,000 from tax - $14,000 maximum from you and $28,000 from your business. If you are over age 50, you may qualify to shelter even more under "catch-up" provisions.

Asset Protection

The federal government provides for asset protection for 401(k) plans against claims by creditors, with very few exceptions. By contrast, IRAs have no federal asset protection and state protections are spotty or nonexistent depending upon the state.

Fund Control

One aspect of pension funds that traders particularly like is the complete freedom to invest their 401(k) contributions as they see fit. All of Traders Accounting 401(k) plans are self-trusteed; you and you alone have oversight on where you invest your retirement money.

Which legal entity is right for your? How can you set up a 401(k) retirement plan? Traders Accounting can help. Our coordinated pension plan department and pension administration service can help you lay the foundation for a tax-smart pension fund that will help you build your trading business now and assure a bright future when you retire.

Jim Forrester, CPA is the Tax Director of Traders Accounting, the nation's leading provider of tax consulting, entity formation, tax preparation and 401(k) services to the trading industry. Traders Accounting teaches traders how to properly set-up their trading business and take advantage of all the money-saving tax strategies available to home-based businesses. Explore the website that Forbes has declared "Best of the Web" for six straight years and find out exactly how to make your trading into a 'business' and receive tax breaks and tax deductions worth up to $25,000 each year. Visit www.tradersaccounting.com for more info.