IRA's For Full-time Investors?

[Guest stubevan]

I've retired early and now make my living as an active, full-time private investor. I could qualify as "trader" for some of my activities, but I prefer to seek long-term capital gains, and marking to market would not help me at the present time. And, my expenses are not so large as to make Schedule C worthwhile.

Am I eligible to contribute to any sort of IRA, including a Roth IRA? Or, am I totally out of luck in terms of being able to contribute to any retirement program?

Thanks,

JSB

[Mary Kay Foss]

I'm not sure even making the election to "mark to market" would help to qualify you for an IRA. You need taxable compensation which IRS defines as (a) wages, salaries, etc (B) alimoney and separate maintenance and © self-employment income reduced by one-half of the SE tax.

Mark to market gains aren't subject to SE tax so you'd have to find some other creative way to generate taxable compensation.

[John G]

"Trader" can be an occupation. It is distinct from investing which implies long term holds. An old TMI/BNA extract I have says "A trader is engaged primarily in the speculative activity from which he derives most of his income, seeking a profit from the short-term swings in the market".

If the bulk of your activity fits the above description of "trader" then you can via a corporation or Schedule C create a structure for taking trader expenses as fully deductable "above the line" components. I have known full time active traders who have elected the corporate structure and with a payroll which enabled them to establish a pension/profit sharing plan. The Schedule C route may enable you to have a Keogh. Both of these options allow for greater overall retirement contributions than IRAs. The folks I have known that have gone this route made 500+ trades a year, often had hold periods <1 week, and showed 1099 statements with multiple millions in transactions... very different from the average "investor".

All of the above are complex arrangements and require a lengthy discussion with your accountant. Note, you will also be paying either SSN (2x) or self employment taxes and significant accounting fees.

[Guest Paul Leslie]

The courts have ruled that a "day trader" is very difficult to prove. JSB you are not a "day trader" because you said that you hold for long term gain. If your average holding period on your stocks is longer than 60 days and your trades are not continious throughout the year, the IRS is going kill you in audit. Plus you must be trading your whole portfolio not just portion. The IRS is going to argue that you are just playing with your fun money. A day trader turns over the whole portfolio.

Either way daytrader's gain from stock sales are capital gains and would never show up on the Schedule C subject to SE tax. The IRS has given the impression that daytraders who make the mark to market election will report the gain on the Form 4797 and those will not show up on the Schedule C either.

So I would say you are out of luck anyway you look at it. Don't take risk--Just invest in highly appreciating stocks or mutual funds that don't generate much income. Or work part time until you earn $2,000 then quit.

[John G]

"Plus you must be trading your whole portfolio not just portion. The IRS is going to argue that you are just playing with your fun money. A day trader turns over the whole portfolio."

I believe the above statement is not true. For example, previously dedicated retirement assets would not have to be traded. It is my understanding that the test would look at if significant activity and income were derived from short term trades. For example, if 70% of you annual income were derived from trades with holding periods of hours/days/weeks, you would stand apart from the general population. A trader does not have to be a professional working on the floor of an exchange. However, the nature of a traders activities significantly diverge from a common investor in terms of frequency, turnover, duration or trade, and the amount of effort involved. Casual trading of a modest assets while maintaining a full time career elsewhere would not qualify.

Clearly, professional opinion in this are varies. If you wish to pursue this idea further you need to talk with a couple of accountants or tax specialists.