| « Back to News Archive |
| Steer Your Retirement Ship Toward Six Islands of Savings |
02-17-2009 |
The recent stock market tsunami has battered retirement plans great and small, eroding the value of underlying holdings and turning once-golden dreams of retirement beachfront into rusty crab pots marooned on the rocks. Those who invested most recklessly suffered dearly, while those with a steady hand on the wheel took a minimal hit.
If there’s a silver lining to this financial storm of the century, it is to remind us to batten down the hatches on our retirement plans and steer them carefully, not just toward that ultimate shore, but also toward the islands of tax savings along the way.
One of the best ways to do this is to form a corporation and establish your own pension fund, commonly known as a 401(k).
For years, corporations have used 401(k) plans, often with a company match, to attract and retain valuable employees while enjoying certain tax benefits. The advantage of a 401(k) plan for an incorporated trader is, as both employer and employee, you realize significant tax savings and retain full control over how your contributions are invested.
It’s true that unincorporated traders have a variety of retirement options available to them, including Individual Retirement Accounts, Roth, SEP and SIMPLE IRAs, and mini or Solo 401(k)s. It’s also true that they’re all solid, tax-advantaged options with some investment upside.
The problem with them is that your contributions remain largely unavailable (with a few exceptions) until you reach retirement age, meaning you miss those islands of opportunity to claim tax savings along the way.
As your own corporation, 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. This affords you significantly more leverage, flexibility and tax advantages than those available to non-entity traders.
Here are six islands of 401(k) tax savings available to incorporated traders:
Borrowing
Most traders would agree: you’ve got to have money to make money. With a 401(k), you can borrow up to $50,000 or 50% of the balance in your account, whichever is less, from yourself to beef up your trading reserves or to use for any other purpose. Not only does the loan come with favorable repayment terms, you pay the interest to yourself, not a bank. You can’t do that with an IRA.
Tax Subsidies
As an employee, you are subject to tax only when amounts are actually distributed from the 401(k). As the employer (your corporation), 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 corporation, you would pay 15.3% FICA (Federal Insurance Contribution Tax) into Social Security, 7.65% on employee and 7.65% on employer contributions. But because you are your own corporation, you can avoid FICA. Here’s how: Say your corporation 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 corporation, 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 corporate and individual contributor to your 401(k), you can shelter up to $46,000 from tax - $15,500 maximum from you and $30,500 from your corporation. If you are over age 50, you may qualify to shelter $5,000 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 401(k) plans are self-trusteed, meaning you and you alone have oversight on where you invest your retirement money.
Is incorporation right for your trading business? How do you set up a 401(k) retirement plan?
Traders Accounting, your trading tax experts, can help. Our integrated Entity Structuring and Pension Plan Establishment services can assist you in laying the foundation for a tax-smart pension fund that will build your trading business now and assure a bright future when you retire.
|
| |
| « Back to News Archive |
|
|
|
- I just listened to your webinar offered re Traders Tax issues and was impressed with the no-nonsense straight talk approach, as well as the informa...
Kirk Knight CPA
|
|
| • |
Comprehensive overview on the business of trading. |
| • |
Learn how to save $5,000 to $8,000 a year off trader tax. |
| • |
Breakthrough recommendations to legally lower your taxes. |
| • |
Fill out our short form to receive the free guide AND a 30 minute phone consultation! |
| • |
Get updates of our weekly Free Webinar Training classes. |
| • |
Automatically receive our weekly newsletter. (No Spam!) |
| • |
Learn if new Tax Court rulings affect you. |
| • |
Get the latest tax reduction strategies. |
|
|
|
|
 |
|
News Details
