Retirement Solutions

Save thousands in taxes with a high-deductible retirement plan deduction and grow your retirement funds tax-free until retirement.

Generally, the best retirement plan for a trader is a Solo 401(k) for TTS S-Corps established on the entity level in connection with officer compensation (payroll).

It combines an “elective deferral” (ED) contribution of $22,500 for 2023 and $23,000 for 2024. Plus, a profit-sharing plan contribution (PSP) up to a maximum of $43,500 for 2023 and $46,000 for 2024. The ED is 100% deductible and provides the main tax benefits. The PSP is 25% deductible, so $43,500 PSP divided by 25%-deductible equals a 2023 officer salary of  $174,000. There is also a “catch-up provision” for taxpayers aged 50 and over of $7,500 for 2023 and 2024. The maximum contribution for those under age 50 is $66,000 for 2023 and $69,000 for 2024. For those 50 or older, it’s $73,500 for 2023 and $76,500 for 2024. 

You can contribute the ED component to a Roth Solo 401(k), forgoing taxable income deferral on a traditional contribution. The profit-sharing plan contribution is tax deductible as an expense of the S-Corp and must be traditional (not a Roth). 

Traders need an entity to generate compensation; consider an S-Corp trading company. Employee benefits, including retirement and health insurance premiums, occur on the S-Corp level. TTS sole proprietors and partnerships cannot pay wages to the owners, so they cannot contribute to a retirement plan since they cannot create earned income from trading profits like with the S-Corp. 

Many leading brokers offer Solo 401(k) plans on a cookie-cutter basis (which means “free”), and some allow active direct-access trading. Some traders cannot achieve in their Solo 401(k) plan the style of trading they do inside retail accounts, so they put off retirement plan contributions until later.

Traders often save thousands by deducting Solo 401(k) retirement plan contributions and health insurance premiums. (There are higher savings when spouses work in the trading business and maximize retirement deductions.) Tax savings depend on income taxes saved versus payroll tax costs incurred. 

For more information, see Green’s Trader Tax Guide, Chapter 8, Retirement Plans.