With only a few days left in the year and the holiday spirit everywhere, we start thinking about the year that was and the year that will be. We think about all the good trades we made and all the bad trades we made.
We vow to be better traders and we look at ways to increase our return on investment (ROI). One sure way of increasing our rate of return is by cutting down our tax liability.
With only a few days left in the year, what kind of magic can we do? What tax plans will we be able to execute in such little time? The biggest impact on our tax liability would be contributing into a retirement account.
For every dollar we contribute into a retirement account we could save as little as 10% of our tax liability and as high as 53% of our tax liability! I call that “Magic”!
What other “safe” investment could you make that can generate a rate of return that is as high as 53% in just a few days? So let’s look at how this works:
How to Reduce Your Tax Liability with Retirement Savings
One of the best vehicles that you can contribute into is the Self Directed Solo 401K plan. This plan allows you to contribute up to $59,000 per year and if you are married you can double that amount to $118,000 per year!
To be eligible to contribute you must have earned income. Trading gains are generally not considered as earned income, so how can traders take part in this great option to reduce their tax liability? Well, they can form a business entity to trade from and issue payroll to themselves and/or their spouse. The payroll is for the management services they provide their company.
As an employee, you could contribute up to $18,000 per year, and if you are over 50 you can contribute up to $24,000 per year per spouse. Your company can make a matching contribution of up to 25% of the salary you issue yourself. The total combined contribution can be as high as $59,000.
When our students hear about this option they get real excited, but then they say “Michael, that Solo 401K plan is great, the problem though, is that I don’t have the cash to make the contribution before year end. It’s the holiday season and I am short on cash.” Then, I tell them about the holiday “magic”. The IRS says that you only must have your plan set up by Dec 31st but that you can actually fund it until the filing deadline of your corporate tax return which is March 15th, 2017. What if you are not ready to file by March? The IRS allows you to file an extension so you will get an additional 6 months to file. This means that you can file your return on Sep 15th, 2017, fund the plan on Sep 17th, but keep the ability to get that massive tax deduction on your 2016 return. Now, you can agree with me? That’s magic!
Setting up a Self Directed 401K also allows you to keep trading your favorite stocks, option, ETFs, forex, futures and even alternative investments such as real estate, tax liens, gold, peer to peer lending and many other options.
One of the other great benefits of the plan is the option to take a loan of up to $50,000. The money can be used for any purpose including making a contribution to your trading account, paying off debt or even buying that big screen TV you want for the holidays.
You can also roll funds from other IRA or 401K plans into the newly formed Solo 401K plan, then take a loan and use those funds as contribution into the new plan. This option is missed by many tax advisors out there.
If you are interested in creating your own “magic” contact one of our OTA Tax Pros Advisors or go to our website and request your free consultation.