401 (K) - SEP - IRA Retirement Plans
Even if you are an individual with substantial trading profits, you will not be able to make any type of retirement contribution based upon those profits. You must have "earned income" and the IRS says trading profits are not earned income.
You must therefore have a separate business entity for your trading business, such as a corporation, in order to establish a retirement plan. Your corporate salary then becomes your earned income.
There are various options when it comes to selecting the right type of retirement plan. It is something that should be carefully considered and not hastily decided upon. It is not within the scope of this discussion is to provide complete information about retirement plans. It can though give you some basics to get you started.
Generally, a business may contribute up to 25% of your salary to a retirement plan. If the plan also includes a 401(K) feature, you can additionally defer up to $16,500 for 2011. If you are age 50 or older, you can defer an additional $5,500 for 2011.
The 2012 contribution limit was increased to $17,000. The 2012 additional contribution for age 50 or older remains at $5,500.
Contributions to a retirement plan are tax deductible up to certain limits and the earnings on the contributions are not taxed until they are withdrawn from the plan.
You must be aware that a taxable withdrawal from your 401k or IRA can result in a substantial income tax bill -- income taxes and penalties could easily exceed 35% of the withdrawal amount. If you really need the cash, you might first consider a mortgage refinance with a cash-out or a home equity loan.
The total amount of contributions and deferred salary cannot exceed $49,000 for 2011. If you are age 50 or older, increase those amounts by $5,500. The total for 2012 is $50,000 and the age 50 or older remains at $5,500.
If you have a 401k plan at your old employer, you can do a tax-free 401k rolloverof that plan into your new sole 401k plan.
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