The only “job” most retirees have is managing their portfolios. It probably is one of the most important jobs you’ve ever held. The portfolio has to help meet expenses for the rest of your lifetime, and it will be part of any legacy you leave.
If you are like most retirees and pre-retirees, there is a separate space in the home to store your investment records and resources. You generally do your research and make decisions there. There might be a computer to help you manage the portfolio. You probably spend some time on the portfolio every week, and many of you give the portfolio some of your attention each day.
Since you are treating portfolio management as a part-time business, shouldn’t you be able to report it as a business on your tax return? Let’s take a close look this tax strategy.
There can be substantial tax advantages to treating your portfolio management as a business. You would file a Schedule C on which you would deduct directly from the investment income your home office expenses and the cost of publications and other resources used in your investment decisions. You also might be able to set up another pension plan to shelter investment income and gains that exceeded your spending needs. A spouse or child could be hired to help out, and the salary would be deductible from the investment income.
When investing is not a separate business, no home office deduction is allowed, and other investment expenses are reported as miscellaneous itemized expenses. They are deductible only if you itemize deductions and only to the extent that all the miscellaneous expenses exceed 2% of adjusted gross income. If your adjusted gross income is $45,000, you deduct only the miscellaneous itemized expenses that exceed $900. Not many people are able to deduct miscellaneous itemized expenses.
Unfortunately, you are facing a stacked deck if you want to treat investing as a business. The IRS and the courts distinguish between traders and investors. Traders can treat investing as a business; investors cannot. The IRS and the courts don’t care how large your portfolio is, how much of your income or net worth it comprises, or even how much time you devote to portfolio management. Instead, the following three factors are what matter.
With these standards, you won’t be able to treat investing as a business if you follow our approach in RETIREMENT WATCH, and you are better off because of it. To meet the tax law’s standards, you have to be a short-term speculator, not an investor. Not many people profit that way, and they don’t have time or energy for much else. With our simple, safety-first approach to investing, we capture long-term market trends and earn long-term capital gains. And we still get to enjoy our profits.
Note on Roth IRAs: No withdrawals are required from a Roth IRA during your lifetime. But the rules aren’t quite as generous for your heirs. Once a Roth IRA owner dies, the beneficiary must begin taking required minimum distributions annually over his or her life expectancy. That means, for example, that if your 11-year-old grandchild is beneficiary of your Roth IRA, the grandchild can withdraw the account over a 70 year life expectancy. The distributions all are tax-free to your grandchild.