Booyah Breakdown: Taxing Questions

Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes. Today is part 13.

The Booyah Breakdown has been getting a ton of mail these last few weeks, thanks to the recent taxes for traders articles and Subprime 101 piece. So today we're going to address some of your questions and comments.

More Trader Tax Issues

Do you know if traders can set up SEP IRAs for themselves? I've heard conflicting info on this.

You need earned income to contribute to an IRA. But in most circumstances, a trader generally doesn't have earned income. In addition, even a trader who elects to mark to market does not pay self-employment tax. So a trader generally cannot contribute to a retirement plan.

The only way you could contribute is if your spouse had earned income or if you were receiving alimony.

Another option is to set up your trading business as an S-corporation. That's the most common type of structure for a closely held business, one in which just a few people -- such as family members -- are involved, and there is no intent to have shares available to the public.

S-corporations are taxed like partnerships for federal tax purposes, which means the corporation's income and deductions flow through to the shareholders (or you) and are reported on personal tax returns.

So you could set your trading business up as an S-corp. and then pay yourself a salary. That would give you the earned income you need to contribute to a retirement plan. Then your new business could then set up a SEP-IRA or other retirement plan. And you could, in turn, set up a personal IRA.

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