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The Tax Thread
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The Tax Thread

  #141 (permalink)
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MWinfrey View Post
I do not have a separate business set up to trade in. I trade in a joint account and only trade futures. I get a single 1099 at the end of the year from my broker. This 1099 simplifies things considerably and as such is a single taxable event regardless how many trades I place during the year. I am taxed on the amount of profit/loss reported on that 1099 and that's it. Very simple.

My plan for the near future is to trade from a Roth account. When I turn 59 1/2, I will be able to withdraw from my Roth account without penalty. By definition as I understand the tax laws is that proceeds from a Roth account are not taxable. Only contributions made to the Roth account are taxable at the time of the contribution. So, being as I will be trading from an existing Roth account, any money made trading futures will not be taxed when I withdraw the money. Further, because I don't any other form of income from a "real" job, proceeds from my Roth account will not effect my ability to draw social security.

Anyone with experience or knowledge contrary to what I've outlined is very welcome to comment.

Hmm - great idea - I don't have a Roth account. Would I be able to fund a Roth account from my trading income and then trade the Roth account to withdraw taxfree after 59.5? Also is there an age limit for contributing to a Roth account? TIA

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  #142 (permalink)
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baritrader View Post
Hello MWinfrey & All.

I am curious as to whether anyone here has pursued this avenue. I have been doing a little research on tax law as it relates to Roth IRAs, and have a cunning plan. Here is what I have found:
  • Contributions made to an IRA may be withdrawn at any time without tax or penalty, as the tax burden on that money has already been fulfilled. (This is a very important point for may plan)
  • A person may have multiple IRA accounts, but total contributions to those accounts are limited to the annual contribution limit set by the IRS. (i.e. If your limit is $6,000 a year and you have 3 Roth IRAs you could contribute $2,000 to each, or divide it up any way you choose, as long as the total is not more than $6,000)
  • Earnings (dividends and interest) on a Roth IRA cannot be withdrawn without penalty and interest until 5 years have passed from January 1st of the year in which the first contribution is attributed (5 year rule).
  • For anyone having more than one Roth IRA the 5 year rule is considered satisfied for all accounts once it has been satisfied for one of them. (This is also important for my plan)
  • Earnings also cannot be withdrawn without penalty and/or interest until the age of 59˝, except for certain "qualified reasons."
  • As the IRS views multiple Roth IRA accounts as one account for tax purposes, withdrawls can be made from any account, subject to the rules above.

So this is my plan:

I have been contributing to a Roth IRA for many years. I am 56 years old so have 3˝ years before I can withdraw any earnings. My plan is to open up a second Roth IRA as a trading account. I will fund it with part of my 2014 contribution, and will forgo that part for my regular Roth IRA for this year. As of 2015 I will continue making full contributions to that account. That way, except for this year's exclusion, my trading will in no way affect my retirement account.

Hopefully the 2nd Roth IRA will grow from my trading. Once it has grown to the point where I want to make withdrawls, I am allowed to withdraw up to what I have contributed to both Roth IRAs. As I have been contributing to the 1st one for many years, that's a good bit of change. And it would certainly see me through the next 3˝ years.

Of course this is all predicated on me doing well trading, and that remains to be seen. But it avoids all taxes, and the hassle of reporting profit/loss, and the need to set up an LLC or some such entity.

Any thoughts? The question is, where can I find a broker who will allow me to trade through a Roth IRA? I use the NinjaTrader platform so it has to be one of the brokers they work with. That list has shrunk since they have started their own brokerage. I have a call in to them to see if they will allow it.

I appreciate any feedback on this. Thanks!

The only other caveat I would mention is that under the ordering rules Roth conversions from a traditional IRA come out after contributions and all though they are tax free (tax was paid on conversion) those dollars are still subject to 10% early withdrawal penalty before 59 1/2.

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  #143 (permalink)
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Suraj View Post
Hmm - great idea - I don't have a Roth account. Would I be able to fund a Roth account from my trading income and then trade the Roth account to withdraw taxfree after 59.5? Also is there an age limit for contributing to a Roth account? TIA

I am not a tax expert, so take this with a grain of salt. I am just starting out trading a Roth IRA.

But the short answer is, YES. You can establish a Roth IRA with a company that specializes in self-directed IRAs. For 2014 you can contribute up to $5500 ($6500 if you're 50˝ or older) as long as you have not contributed to any other retirement account during the year. Once the IRA is established, the company will transfer the amount you specify to your broker. This money must be in a separate account, as any profit generated must be independently connected to the IRA funds. Those profits are tax free as long as they are not received as a distribution before you are 59˝.

You are allowed to withdraw any money you contribute to the fund at any time. Earnings withdrawn before you turn 59˝ are subject to tax and, depending on the reason, possibly also a penalty.

As for an age limit, since the money is tax free I don't believe there is an age limit for contributions. With a traditional IRA, once you turn 70˝ you must take a yearly distribution based on your age and the total value of the fund. With a Roth IRA the money can stay there as long as you want. I suppose you can also continue contributing as long as you want. But I will ask my fund manager about that point.

Ideally, of course, you could make contributions now for 2014 and in January for 2015, and with proper money management that should be enough to trade with indefinitely!

Cheers!

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  #144 (permalink)
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aharry View Post
The only other caveat I would mention is that under the ordering rules Roth conversions from a traditional IRA come out after contributions and all though they are tax free (tax was paid on conversion) those dollars are still subject to 10% early withdrawal penalty before 59 1/2.

Since both of my IRAs, the one I have just opened and my "retirement" IRA, are Roths, that isn't an issue for me.

But for those for whom it might be, does that also apply to contributions made to the traditional IRA? I would think that since the taxes had been paid on conversion, any and all contributions would be treated equally under the rules of a Roth.

Thx!

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  #145 (permalink)
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baritrader View Post
Since both of my IRAs, the one I have just opened and my "retirement" IRA, are Roths, that isn't an issue for me.

But for those for whom it might be, does that also apply to contributions made to the traditional IRA? I would think that since the taxes had been paid on conversion, any and all contributions would be treated equally under the rules of a Roth.

Thx!

The rule is to prevent someone under 59 1/2 from using a conversion to avoid the 10% penalty. Let's say you had a traditional IRA and you needed $5000 but were not yet 59 1/2. You convert the amount you need to a Roth and pay the tax on the amount converted and then withdraw it from the Roth. It is still subject to 10% penalty.

Whereas if you made a $5000 contribution to a Roth and then withdraw it there is no tax or penalty.

Many Roth IRAs were funded by traditional IRA conversions and those dollars must be tracked separately from actual Roth contributions under the ordering rules.

If all of your Roth account is contributions and earnings then it would not apply.

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  #146 (permalink)
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There is no age limit for contributing to a Roth, but you must have earned income, I hope to not be working at 70 1/2.

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  #147 (permalink)
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aharry View Post
There is no age limit for contributing to a Roth, but you must have earned income, I hope to not be working at 70 1/2.

Does income from trading qualify as earned income? TIA

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  #148 (permalink)
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Suraj View Post
Does income from trading qualify as earned income? TIA

Depends on if you qualify as a trader under IRS rules. If you do then your trading activity is reported on Schedule C and net income from self-employment is considered earned income. Also, if you trade under an entity such as a corp, s-corp, or LLC and pay yourself a salary, the salary reported on form W-2 would be earned income.

Tax Topics - Topic 429 Traders in Securities (Information for Form 1040 Filers)

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  #149 (permalink)
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aharry View Post
Depends on if you qualify as a trader under IRS rules. If you do then your trading activity is reported on Schedule C and net income from self-employment is considered earned income. Also, if you trade under an entity such as a corp, s-corp, or LLC and pay yourself a salary, the salary reported on form W-2 would be earned income.

Tax Topics - Topic 429 Traders in Securities (Information for Form 1040 Filers)

Thanks, if not for anything else, I can trade partly under an LLC to fund the Roth which would then allow trading tax free! Wow.

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  #150 (permalink)
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