Tag Archives: retirement

Green’s 2023 Trader Tax Guide

June 18, 2020 | By: jparasole

Purchase the online PDF version in our Green & Company, Inc. store. Amazon offers a paperback version.

Our online guide PDF is 113 pages, 8 x 11, single-spaced, and easy to read. You get access immediately after purchase and see the Download PDF link in your email receipt. We might update this online guide during 2023 for tax changes that impact traders, and you will have access to the updated versions. 

Highlights

Use Green’s 2023 Trader Tax Guide to receive every trader tax break you’re entitled to on your 2022 tax returns. Learn intelligent moves to make in 2023. Whether you self-prepare your tax returns or engage a CPA firm, this guide can help you optimize your tax savings. Even though it may be too late for some tax breaks on 2022 tax returns, you can still use this guide to execute these tax strategies and elections for tax-year 2023.

The 18 chapters cover trader tax status, Section 475 MTM, tax treatment (equities, 1256 contracts, options, ETFs, ETNs, forex, precious metals, cryptocurrencies, etc.), accounting for trading gains and losses, trading business expenses, tips for preparing tax returns, tax planning, entity solutions, retirement plan strategies, IRS and state tax controversy, traders in tax court, proprietary trading, investment management, international tax, ACA Net Investment Income Tax, short selling, Tax Cuts and Jobs Act, CARES Act, and recent tax law changes.

Green’s Trader Tax Guide has been published yearly since 1997 and remains the gold standard in trader tax.

About the Author
Robert A. Green is a CPA and CEO of Green & Company, Inc. (GreenTraderTax.com). Mr. Green is a leading authority on trader tax and a Forbes contributor. He is also the author of The Tax Guide for Traders (McGraw-Hill, 2004) and Green’s annual Trader Tax Guide. Mr. Green is frequently interviewed and has appeared in the New York Times, Wall Street Journal, Forbes, and Barron’s. He is the Traders Expo’s chief tax speaker and presents tax Webinars for Interactive Brokers, TradeStation, Lightspeed, and other trading industry participants.

 

 

Entity & Benefit Plan Tax-Advantaged Solutions 2016

May 18, 2016 | By: Robert A. Green, CPA

In this 46-minute recording, entity tax expert Robert A. Green CPA explains how traders who qualify for trader tax status (TTS) can unlock health insurance and retirement plan deductions using an S-Corp trading company or C-Corp management company. Learn the best entities and retirement plans for traders and how to maximize use of tax elections like Section 475 MTM. Published May 17, 2016.

Entity & Benefits Plan Tax-Advantaged Solutions 2016 (Recording)

May 3, 2016 | By: Robert A. Green, CPA

Description:

Join entity tax expert Robert A. Green CPA as he explains the following:

– Employee-benefit plan deductions: Traders who qualify for trader tax status (TTS) unlock health insurance and retirement plan deductions using an S-Corp trading company or C-Corp management company. Individual retail traders don’t have self-employment income so they cannot have employee-benefit plan deductions. See examples of saving $7,000 to over $16,000 in taxes.

– Tax loss insurance: Traders in securities with TTS benefit from a Section 475 election: It exempts them from wash sale loss adjustments and a capital loss limitation. It’s better to ring-fence Section 475 trades within an entity, segregating them from investments in individual taxable and IRA accounts. New entities may elect Section 475 within 75 days of inception.

– Best entities: Learn the best choice of entity for different situations. An S-Corp is best for maximizing employee-benefit deductions; otherwise, a partnership tax return works well. A C-Corp is inappropriate as a trading vehicle, but okay as a management company. In some cases, having a trading company and a management company is helpful.

– Best retirement plans: Learn the basics on Solo 401(k) defined contribution plans and more powerful defined benefit plans.

– Timing: Mid-year is an excellent time to form a trading entity. It breaks the chain on wash sales in your individual taxable accounts and there’s plenty of time to maximize employee-benefit plan deductions for the entire year.

Our live event is complimentary and we plan to offer a complimentary recording.

Related blog posts:
Active Traders Should Consider An Entity For Tax Savings
Safeguard Use Of Section 475 By Trading In An Entity

MarketWatch

February 15, 2016 | By: Robert A. Green, CPA

If you’ve started day trading, you have until July 15 to opt for this ‘fire insurance’ with the IRS
Andrew Keshner. Read the article on MarketWatch.

July 15 is Tax Day — and the deadline for a decision connected to trading loss deductions next tax season. Quotes from Darren Neuschwander CPA:

The mark-to-market election is like “fire insurance,” according to Darren Neuschwander, CPA and a managing member of Green, Neuschwander & Manning, a firm for traders and investments managers that’s seen a 100% increase in prospective client consultations year-over-year.

The election doesn’t boost someone’s portfolio, but Neuschwander said it makes “a substantial difference when you’re basically burning down in the market.”

The tax code itself doesn’t lay down hard and fast eligibility rules, but Neuschwander said Tax Court cases give guidance. The case law says people who are traders for tax purposes need to make at least 720 trades in the year with an average holding period under 31 days. There’s approximately 250 trading days, Neuschwander noted.

If they’ve already submitted their returns, Neuschwander said they can print the first and second pages of their 2019 return, write “do not process” and include a cover letter stating the election was inadvertently omitted. The post mark has to be by July 15, he noted.

The mark-to-market election can sound enticing, but it can be a drawback in certain scenarios, Neuschwander said.

With more than five months before the year’s done, it may be tough for someone to game out how they’ll end the year. But Neuschwander said it’s a tax strategy they’ll have to weigh one way or another.

“If you’re down for the year, which a lot people may have gotten into this first year… if they have enough trades, and don’t have that capital loss carry forward, you want that fire insurance.”

Should you invest your IRA in a startup?
August 26, 2013, By Glenn Ruffenach. Read the article on MarketWatch.

Excerpt:

“If you’re thinking about entering these waters, get ready for lots of homework and, of course, seek expert advice. Then again, “if you’re the kind of person who doesn’t want any trouble, why go there,” says Robert A. Green, a certified public accountant and chief executive of GreenTraderTax.com, which advises traders.”

Defined Benefit Plans Offer Huge Tax Breaks

November 23, 2015 | By: Robert A. Green, CPA

Click to read Green's blog post

Click to read Green’s blog post

Consistently high-income business owners, including trading businesses with owner/employees close to age 50, should consider a defined-benefit retirement savings plan (DBP) for significantly higher income tax and payroll tax savings vs. a defined-contribution retirement savings plan (DCP) like a Solo 401(k).

DBP calculations are complex
DBP calculations are more complex than a DCP profit-sharing plan. With a DBP, an actuary is required to consider various factors in calculating retirement benefits and annual contributions to the DBP.

The first factor is three-year average annual compensation and the IRS limit is $265,000 (2015/2016 limits). W-2 compensation may be higher, but the actuary may only input the IRS limit. Compensation determines the accumulated retirement benefit and retirement plan distributions/income during retirement years. The IRS limits retirement benefits per year to $210,000 (2015/2016 limits). Based on the maximum factors possible, the accumulated retirement benefit would be approximately $2.6* million.

If the participant plans 10 years of service retiring at age 62, with a 5% growth rate the retirement plan contribution would be $207,000* for the initial years. If that same person has 15 years of participation the annual retirement contribution would be $120,500*. (*Calculations provided by PACE TPA.)

Meet with a DBP administrator/actuary
When you meet with a DBP administrator/actuary, look at some “what if” scenarios with different levels of compensation and years to retirement.

There’s plenty of room for different scenarios between a Solo 401(k) limit of $59,000 for age 50 or older vs. a DBP contribution, which can range between $60,000 and $300,000 per year in the initial years. Traders operating in an S-Corp have the option to use a lower officer compensation amount.

What’s the catch?
A DBP requires annual funding contributions, whereas a DCP does not. With a DBP, the owner/employer commits to saving the actuary-determined accumulated retirement savings amount.

Closing a DBP without a valid reason could lead the IRS to disqualify the plan, making the accumulated benefit taxable income in the year of disqualification. Closing a trading company due to significant trading losses should be a valid reason. On DBP termination, most plan documents allow a tax-free rollover to an IRA or other qualified plan or a lump-sum taxable distribution. The 10% early withdrawal tax rules apply on qualified plan distributions before age 55 (see below).

You should consult your DBP administrator on a timely basis — before June 30 or 1,000 hours of service — to modify the DBP when necessary. For example, if you’re making significantly less income in the first three years, the administrator may be able to lower required contributions. Some DBP administrators recommend maximum allowed funding in early years, which serves to reduce minimum funding requirements in later years. This makes sense as you may make less money as you approach retirement.

You can do direct-access investing or trading inside the DBP account. Leading brokers may allow trading in stocks, bonds, ETFs and restricted trading in options. Avoid margin interest, which triggers unrelated business income tax (UBIT). Caution: Investment losses in the DBP will require larger contributions to make up those losses. Conversely, stellar trading gains can serve to reduce contributions too.

Compensation defined
In an S-Corp, only wages are considered in compensation; pass-through Schedule K-1 income is not. Conversely, with an operating business partnership tax return, all self-employment income (SEI) including guaranteed payments and pass-through income for active partners is included in compensation. A trading partnership has underlying unearned income, which is not SEI.

Payroll tax savings
Under DBP rules, average compensation is determined over the initial three years of the plan and compensation amounts afterward don’t affect DBP contributions and benefits. After three years, a trader may significantly reduce officer compensation, which has the effect of reducing payroll taxes. Payroll taxes include FICA 12.4% up to the SSA wage base amount of $118,500 (2015 and 2016 limits) and unlimited 2.9% Medicare tax. Plus, upper income taxpayers have a 0.9% Medicare/Obamacare surtax on wages. That leaves traders enjoying the tremendous income tax savings with a much smaller offset of payroll taxes. This option to reduce payroll taxes is not available with a Solo 401(k).

An S-Corp trading company has underlying unearned income, which should be an acceptable reason to the IRS for why the S-Corp may not otherwise comply with IRS guidelines for reasonable officer compensation. Conversely, a regular S-Corp operating business like an investment manager receiving management fees or an IT consultant must adhere to IRS guidelines for reasonable compensation. Currently, the guidelines call for 25% to 50% of net income before wages to be officer compensation.

Establish a DBP and execute payroll before year-end
Speak to a DBP administrator well before year-end to establish the plan by Dec. 31. You can fund the plan up until Sept. 15 of the following year — the extended due date of the S-Corp tax return.

You also need to execute officer compensation payroll before year-end.

Although the DBP is based on a three-year average of compensation, you may open a DBP in the first year of S-Corp trading company. Without a three-year average in that first year, there’s a narrower range of minimum vs. maximum contributions each year. If your income drops considerably in the second year, contact the DBP administrator, who can probably modify the plan to lower compensation amounts. After the three-year average of compensation is set, the administrator can’t modify it lower. You also can’t unwind accumulated retirement benefits earned to date.

Types of DBP plans
For an S-Corp trading company with a single owner/employee or a spousal S-Corp with two employees and no outside employees, we recommend a traditional or personal DBP or a “cash balance” DBP with a separate DBP investment account established for each owner employee.

Two spouses working in an S-Corp trading company can take advantage of the hybrid plan: A DBP integrated with partial Solo 401(k) (elective deferral and 6% profit-sharing rather than the normal 25% profit-sharing). If there’s only one employee, the traditional DBP or cash balance DBP is used.

Anti-discrimination rules
There are many anti-discrimination rules and requirements for high-deductible qualified plans intended to prevent the owner/employee from enjoying huge benefits with “top-heavy plans” while omitting or short-changing non-owner employees. Plan designers offer options like vesting over several years for complying with these rules but still favoring owners where possible.

Affiliated service group (ASG) rules apply in a similar context. If you own a business with many employees, you can’t exclude those employees by owning a separate (affiliated) S-Corp trading company with a high-deductible qualified plan for you alone. Consult an employee-benefit plan attorney.

Consult your tax advisor
After you speak with a DBP administrator, actuary, and perhaps an employee-benefit plan attorney, consult your tax advisor on choosing the compensation amount, which drives the related targeted retirement savings goal under the DBP. For S-Corp operating businesses, officer compensation must adhere to IRS guidelines for reasonable compensation, too.

Make sure you are comfortable committing to the annual minimum funding amounts of the DBP. If you want a lower commitment, choose a lower compensation amount. If the DBP calculation shows an annual contribution under $60,000, you are probably better off choosing a Solo 401(k) as it does not require annual funding and its limit is $53,000 for under age 50 and $59,000 for age 50 and older (2015 and 2016 limits).

With Solo 401(k) retirement plans, our CPA firm doesn’t want to see a S-Corp loss after deducting compensation and the retirement plan contribution. We apply this same rationale to the first year of a DBP plan. It’s wise to have sufficient S-Corp year-to-date trading income and expect similar trading gains in subsequent years so there won’t be an S-Corp loss from these large deductions. Once you start the DBP, mandatory contributions may generate a net loss in the S-Corp and that is acceptable. Explain the net loss and DBP funding commitment in a tax return footnote.

Your S-Corp trading company must qualify for trader tax status (business expense treatment), otherwise you can’t have officer compensation and retirement plan contributions in an investment company.

Costs and tax filings
DBP administrators charge $1,200 to $2,000 to design and establish a DBP. DBP administrators also charge around $1,200 to $2,000 per year for plan administration to keep the plan up to date along with modifications based on your evolving needs and changes in the law. Employee-benefit attorneys charge closer to $3,000 to $5,000 or more for DBP design and an attorney is not required. Net tax savings far exceeds these reasonable fees. In many cases, the DB administrator covers the cost of an independent actuary.

Charles Schwab offers a Personal Defined Benefit Plan and they have good resources on their site.

The IRS and The Employee Retirement Income Security Act of 1974 (ERISA) have many stringent rules and requirements for DBPs and it’s imperative to stay in proper compliance. Keep your DBP administrator aware of changes so they can make necessary modifications to the plan on time. There are many pitfalls to avoid with DBP and it’s not as simple as a Solo 401(k) or IRA.

As with all qualified plans, the sponsor of a DBP most likely must file an annual IRS Form 5500 tax return due July 31 of the following year for calendar year entities and plans. A 2½-month extension to Oct. 15 is allowed on Form 5558. Several administrators help with this tax form.

Tax-free growth and retirement distributions
Unless you are making non-tax-deductible contributions to a Roth IRA or Roth Solo 401(k) plan, with traditional retirement plans including qualified plans and IRAs, you get an income tax deduction from gross income for the contribution amount.

With a Roth plan, tax savings are permanent. Conversely, with a traditional qualified plan like a DBP or DCP, there is only tax deferral. Enjoy tax-free growth in the plan until taking taxable retirement plan distributions in retirement years. For traders who do more short-term investing, this annual tax savings is huge. Use a retirement plan calculator and you’ll see the power of tax-free compounded growth. Consider the time-value of money with tax deferral as well.

Under current tax law, retirement-plan distributions are ordinary taxable income. “Early withdrawals”(before retirement years age 59½ in an IRA or age 55 in qualified plans) are also subject to a 10% excise tax penalty on IRS Form 5329. Qualified plans including Solo 401(k) and DBP can offer qualified plan loans, which avoid early withdrawals. Qualified plans are a form of deferred compensation, but there are no payroll taxes on retirement plan distributions or contributions.

In qualified plans, there are required minimum distributions (RMD) by a participant’s required beginning date (RBD). The RBD rule is similar to the RMD rule for IRAs with distributions required no later than by age 70½.

Bottom line
If you are close to age 50, have consistently high annual income, can afford to commit to large tax-deductible contributions and want to smooth your taxable income in retirement taxed at lower tax brackets, then a DBP may be for you. The tax savings is enormous and with tax-free compounded growth it’s an incredible retirement savings tool.

 

 

Year-End Planning For Entities: Payroll, Retirement And Health Insurance (Recording)

November 4, 2015 | By: Robert A. Green, CPA

Join CPA members Robert A. Green, Darren Neuschwander and Adam Manning for this important Webinar event.

If you operate an S-Corp trading company or S-Corp or C-Corp management company, you need to execute officers’ compensation (payroll) before year-end if you want employee-benefit plan deductions. You also need to establish some retirement plans before year-end including a Solo 401(k) plan or a defined-benefit plan. The elective deferral portion of a Solo 401(k) must be funded and integrated with year-end payroll. (You can fund the profit sharing plan portion in 2016.) If you don’t act before year-end, you will lose these valuable tax benefits.

In this Webinar, learn how to:

  • Maximize and plan employee-benefit plan deductions including retirement plans and health insurance premiums.
  • Determine the appropriate amount of officers’ compensation.
  • Execute payroll in December when you have visibility on annual trading gains, losses and expenses.
  • Add officers’ health insurance premiums to officer W-2 taxable wages.
  • Select a payroll tax service provider. (We recommend Paychex.)

Examples Worksheet (PDF). (We revised the Defined Benefit Plan column after the Webinar.)

 

Retirement Plan Strategies For 2015

October 28, 2015 | By: Robert A. Green, CPA

forbes_logo_main

Click to read Green’s post on Forbes

There’s still ample time in 2015 to rearrange the timing of your investments, trading, retirement and business affairs to improve your overall taxes for 2015 and surrounding years.  In this second blog post of our year-end tax planning series I focus on retirement plans.

Retirement plans for traders can be used several ways. You can trade in the retirement plan, build it up with annual tax-deductible contributions, borrow money from it to start a trading business and convert it to a Roth IRA for permanent tax-free build-up. Whatever the use, traders often need help through these important planning opportunities. There are plenty of pitfalls to avoid like early withdrawals subject to ordinary income tax rates and 10% excise tax penalties, and penalties on prohibited transactions.

Tax-advantaged growth
Many Americans invest in the stock market through their 401(k), IRA or other types of traditional retirement plan. Capital gains and losses are absorbed within the traditional retirement plans with zero tax effect on current year tax returns. Only withdrawals (or distributions) generate taxable income at ordinary tax rates. The retirement plan does not benefit from lower long-term capital gains rates. Traditional retirement plans aren’t disenfranchised from deducting capital losses, since a reduction of retirement plan amounts due to losses will eventually reduce taxable distributions accordingly.

Defined contribution plan vs. defined benefit plan
Most private companies switched to defined contribution plans, whereas public-sector unions still use richer defined benefit plans. In a defined contribution plan, the contribution is defined as a percentage of compensation, whereas in a defined benefit plan, the retirement benefit itself is defined.

If you own and operate a small business, consider a Solo 401(k) defined contribution plan. It combines a 100% deductible “elective deferral” contribution ($18,000 for 2015) with a 25% deductible profit-sharing plan contribution on an employer-level plan. There is also a “catch up provision” ($6,000 for 2015) for taxpayers age 50 and over. Together, the maximum tax-deductible contribution is $53,000 per year and $59,000 including the catch up provision (based on 2015 and 2016 IRS limits).

Consistently high-income business owners, including trading businesses with owner/employees close to age 50, should consider a defined-benefit retirement savings plan (DBP) for significantly higher income tax and payroll tax savings vs. a defined-contribution retirement savings plan (DCP) like a Solo 401(k). Read our blog post Defined-benefit plans offer huge tax breaks.

Get started before year-end
Contact your tax advisor in early November as these plans take time to consider, establish and fund. Several large online brokers offer Solo 401(k) plans, otherwise known as Individual 401(k)s. Paychex, our recommended service provider for payroll tax compliance, also offers the Solo 401(k) product and integrates it with payroll tax compliance. The Paychex Solo 401(k) product contains the plan loan feature, whereas I only know of one large broker that also offers a plan loan feature (TD Ameritrade). Direct-access trading is allowed with all these options. (Paychex has a team dedicated to GreenTraderTax clients – brochure.)

Only a few top brokers offer a defined benefit plan product.

Solo 401(k) defined contribution plans and defined benefit plans must be established before year-end, so get started by early December. IRAs can be established and funded after year-end by April 15. A SEP IRA can be established and funded by the due date of the tax return including extensions, so if you miss the Solo 401(k) deadline, that could be a last resort option.

A Solo 401(k) is better for most traders in most situations than a SEP IRA, because it has a 100% deductible elective deferral in addition to profit sharing plan and the SEP IRA only has the profit sharing plan. In a Solo 401(k), it takes a lower amount of wages to maximize the higher contribution amount versus a SEP IRA. Because traders are in control of the compensation amount they can achieve a higher income tax benefit versus a lower payroll tax cost with a Solo 401(k).

Contributions to IRAs
Traditional and Roth IRAs allow a small annual contribution if you have earned income: $5,500 per person if under age 50 and $6,500 if 50 and older (2015 and 2016 limits). If you (and your spouse) are not active in an employer-sponsored retirement plan, or if either of you are active but your modified adjusted gross income (AGI) doesn’t exceed certain income limits, you may contribute to a traditional tax-deductible IRA.

Non-deductible IRA. If you have earned income, you should also consider making a non-deductible IRA contribution, which doesn’t have income limits. The growth is still tax deferred and you are not taxed on the return of the non-deductible contributions in retirement distributions. The general rule applies: If you deduct the contribution, the return of it is taxable, but if you don’t deduct the contribution, the return of it is non-taxable. Income growth within the plan is always taxed unless it’s inside a Roth IRA.

Contributions require SEI or wages
Many traders are interested in making tax-deductible contributions to retirement plans for immediate income tax savings in excess of payroll tax costs and to actively trade those accounts with tax deferral and growth until retirement. But, there is an obstacle: Trading gains and portfolio income are not self-employment income (SEI) or compensation, either of which is required for making contributions to a traditional or Roth retirement plan. (The exception to this is futures traders who are full-fledged dealer/members of options or futures exchanges; their individual futures gains are considered SEI.) You can overcome this obstacle with a trading business entity — S-Corp trading company or C-Corp management company — paying compensation to the owner/trader. This strategy does not work for investment companies, though.

Early withdrawals vs. a qualified plan loan
If you need to withdraw money from a traditional retirement plan before retirement age 59 ½ for IRAs and age 55 for a 401(k), in addition to the distribution being taxable income, you’ll probably owe a 10% excise tax penalty subject to a few limited exceptions (Form 5329). In lieu of an early withdrawal, consider a loan from a qualified plan like a Solo 401(k). IRAs are not qualified plans and loans would be a prohibited transaction blowing up the IRA, making it all taxable income. You can borrow up to the lower of $50,000 or 50% of plan assets, and you must repay the loan with market interest over no longer than five years and a quarterly basis.

Required minimum distributions
Per Thomson Reuters, “Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70½ in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016 — the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016 — bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.”

Roth retirement plans and conversions
A Roth retirement plan is different from a traditional retirement plan. The Roth plan has permanent tax savings on growth, whereas the traditional retirement plan only has deferral with taxes owed on distributions in retirement. Distributions from a Roth plan are tax-free unless you take an early withdrawal that exceeds your non-deductible contributions to the plan over the years (keep track well).

Consider annual contributions to a Roth IRA. The rules are similar to traditional IRA contributions. Also, consider a Roth IRA conversion before year-end 2015 to maximize use of lower tax brackets, offset business losses and fully utilize itemized deductions.

Here’s an example: Assume a trader left his job at the end of 2014 and incurred trading losses in 2015 with trader tax status and Section 475 MTM ordinary loss treatment as a sole proprietor. Rather than carry back an NOL that could draw IRS attention, or carry forward the NOL to subsequent years when income isn’t projected, this trader rolls over $300,000 from his prior employer 401(k) to a Rollover IRA and enacts a Roth IRA conversion for $300,000 before year-end. He winds up paying some taxes within the 15% ordinary tax-rate bracket. If the trader skipped a Roth conversion, he would lose tax benefits on his itemized deductions including real estate taxes, mortgage interest, charity, and miscellaneous itemized deductions. This trader’s Roth account grows in 2016 and he chooses to skip a recharacterization. (If a recently converted Roth account drops significantly in value in the following year, a taxpayer may reverse the Roth conversion with a “recharacterization” by the due date of the tax return including extensions (Oct. 15).

Also, after recent market corrections in indexes and many individual stocks, consider a Roth conversion at lower amounts to benefit from a potential recovery in markets inside the Roth IRA where that new growth is permanently tax-free. Converting at market bottoms is better than market tops.

DOs and DON’Ts of using IRAs and other plans
Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments (read our blog post). Many traders may be triggering IRS excise-tax penalties for prohibited transactions including self-dealing and/or UBIT (unrelated business income tax) by using their IRAs and other retirement funds to finance their trading activities and alternative investments. Spot these problematic schemes early, like the IRA-owned LLC. Avoid “blowing up” your IRA, which means it becomes taxable income; plus there are severe penalties.

When it comes to retirement plans and tax savings, it’s wise to do tax planning well before year-end to maximize your available options. The door closes on many at year-end.

How To Set Up A Trading Business With Maximum Tax Savings

September 18, 2015 | By: Robert A. Green, CPA

In this 50-minute recording, trader tax specialist Robert Green explains investment expense treatment, how trader tax status (TTS) business expense treatment is much better and how to qualify for TTS. Mr. Green explains how active traders use entities to maximize deductions for retirement plan contributions and health insurance premiums. Published Sep. 17, 2015

Certain Retirement Plans Must File A 5500

July 21, 2015 | By: Darren L. Neuschwander CPA

forbes_logo_main

Green’s blog post

As our firm has stated for years, the best retirement plan for a business trader is a defined-contribution employer 401(k), as this plan allows up to a maximum tax-deductible contribution of $53,000 ($59,000 if age 50 and over) based on 2015 IRS limits. As the majority of business-trading entities are owned 100% by the trader or jointly with his/her spouse, a Solo 401(k) plan is the preferred structure.

A Solo 401(k) plan, also referred to as an Individual 401(k), Mini 401(k) plan, Owner-only plan or One-participant plan (the legal name), is a “qualified” retirement plan that:

a) provides benefits to the 100% business owner only (or the 100% owner and his/her spouse); or

b) provides benefits to one or more partners in a business partnership only (or partner(s) and spouse(s) only in a partnership).

This applies to all business entities including: C or S Corporations, Sole Proprietorships, Partnerships, LLCs, or LLPs. (In our content, we also use the term “employer 401(k)” plans for S-Corp trading businesses and C-Corp management companies.)

Typically a Solo 401(k) plan does not have annual filing requirements unless the plan balance exceeds $250,000 in assets (including all liquid cash and non-liquid assets). If this is the case, an information return (Form 5500-EZ) is required to be filed with the Internal Revenue Service (IRS).

Form 5500-EZ must be filed on or before the last day of the seventh month after the end of the plan year. However, Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) can be filed with the IRS on or before the normal due date to receive an automatic two-and-a-half-month extension. For calendar-year plans, the due date is July 31. By filing a Form 5558, the due date is extended to Oct. 15.

The following significant penalties will be accessed for not timely filing a Form 5500:

·         Failure to timely file with the IRS — $25 per day

·         Failure to timely file the return with the Department of Labor (DOL) — $50 per day

·         Failure to timely file with the Pension Benefit Guaranty Corporation (PBGC) — $1,100 per day. Note that one-participant plans and plans “without employees” fall under the PBGC coverage exemption.

The IRS recently provided some penalty relief. Per http://www.irs.gov/uac/Newsroom/Small-Businesses-Can-Get-IRS-Penalty-Relief-for-Unfiled-Retirement-Plan-Returns, ‪”Small businesses that fail to file required annual retirement plan returns, usually Form 5500-EZ, can face stiff penalties — up to $15,000 per return. However, by filing late returns under this program, eligible filers can avoid these penalties by paying only $500 for each return submitted, up to a maximum of $1,500 per plan. For that reason, program applicants are encouraged to include multiple late returns in a single submission. Find the details on how to participate in Revenue Procedure 2015-32 on IRS.gov.” This is a good opportunity to catch up with 5500-EZ compliance for late years so speak with us about it soon.

Outside administrators often prepare 5500-EZ for clients but many traders act as their own administrator which means they need to deal with 5500-EZ on their own. Brokers often send annual guidance on filing 5500-EZ to their clients who have self-directed Solo 401(k) plans. Benefit plan information tax filings are not part of our firm’s income tax compliance engagement letters. IRAs are not qualified plans and therefore don’t have a 5500-EZ filing requirement.

If the Solo 401(k) plan balance is less than $250,000 by Dec. 31st, the IRS Form 5500-EZ normally does not have to be filed. However, we suggest considering the following:

·         Filing the Form 5500-EZ starts the statute of limitations regarding plan qualification (three-year vs. no statute regarding taxes and penalties due if the plan is disqualified). We recommend filing Form 5500-EZ regardless of this allowable exclusion; starting the statute of limitations running is a good idea.

·         Whether the plan has in excess of $250,000 or as little as $5,000, the owner-only business or self-employed individual plan sponsor is required to file a Form 5500-EZ for the year in which a plan is terminated. When a trader exits their trading business they need to deal with this filing requirement.

·         If the trust assets are not reconciled annually, how would the eventual preparer of the Form 5500-EZ timely determine if the owner-only business or self-employed individual “operated” the plan in accordance with the applicable rules under the law and permitted by the particular plan relative to the use of plans funds?  For example:

o   Were contributions made timely?

o   Were there any distributions during the plan year?  If yes, for what?  Does the plan permit loans? If yes, was it properly documented; repaid timely?

·         If the plan assets are held at multiple institutions, who monitors when the assets achieve the $250,000 threshold?

If you have a Solo 401(k) plan during 2014, even if assets are less than $250,000 within the plan, we strongly suggest you file Form 5500-EZ.

We can help:
We are happy to assist you with the preparation and filing of the 2014 Form 5500-EZ. Given that we are less than two weeks away from the filing deadline, we suggest that we file for an extension of your plan’s filing requirement for tax year 2014 from July 31st to Oct. 15, 2015.

To get started, please purchase our Form 5500 retirement plan tax compliance – advance payment. After your advance payment is made, our admin team will follow up with you with an engagement letter and information request for your Solo 401(k).

Robert A. Green, CPA contributed to this blog post.