IRA for Professional Gambler

[ZServe]

Background: 26 years old, this will be my second year filing my tax return as a professional gambler. For 2004 I reported about $13,000 in income. 2005 will be about $32,000. I am hoping to put $5,000 into an IRA before April to get the tax break, but am not sure how to go about it.

Am I eligible for a Roth IRA? The reason I ask this is because I read somewhere that gambling winnings cannot be used as income for IRA purposes. Maybe this is only if you are not a professional?

I currently use ING for my savings, would like to keep my IRA in the same place for convienence. Anyone have experience with ING for this purpose?

I am planning on buying a house later this year as well. Does this change what my best course of action is? Right now I am planning on making a $35,000 down payment and putting $5,000 in the IRA. Should I put the max in the IRA instead ($8,000?) and make the down payment a little lower?

I know thats alot of questions, thanks in advance for any replies.

[Dazarath]

The IRS site says gambling winnings are considered unearned income. I don't know if this changes since you're filing under professional status. You'll have to ask someone else about that.

http://www.irs.gov/businesses/small/...onal/article/0,,id=96811,00.html

I don't have any experience with ING for IRAs, but I would probably suggest using one of the standard brokerages. If you are planning to invest in stocks for your IRA, chances are the commissions will be lower. If you are planning to invest in mutual funds, places like Fidelity, Vanguard, Schwab, etc will probably have a better selection.

If you can't contribute to a Roth IRA, you should look into SEP-IRAs instead.

The maximum contribution for 2005/2006 is $4000, not $5000 or $8000.

http://beginnersinvest.about.com/cs/...ntribution.htm

[TomG]

At that income level, your IRA contributions may even be eligible for a Retirement Savings Contributions Credit.

[lastsamurai]

If you or your spouse is a first time home buyer you could put up to 10K from your IRA as a down payment.

The loop hole to this rule is if you havent own a house for 2 years you are considered a first time home buyer.

When you are ready to get your taxes done ask your tax professional if it would make a difference when he inputs all your data Roth vs Traditional.

[tiltaholic]

This is my understanding of your situation:

You have made $32000 in 2005.
This money is being reported on Schedule C (as a profit from business as a "pro" gambler).

If so, this is considered income from self-employment.
Self-employment income counts as earned income for the purposes of contributing to a Roth or a Traditional IRA.
If this $32000 represents all of your income, then you are elligible to contribute to a Roth IRA (up to $4000), but this contribution does not give you a tax break. If, instead, you contributed the $4000 to a traditional IRA, then it could give you a tax break (provided your income fits under the limits.) Your personal IRA contribution is maxed out at $4000 either way for all of your personal IRA contributions added together.

Now, since you are self-employed and filing schedule C as a sole-proprietor business you are eligible for the small-business retirement plans. One of these is a SEP-IRA (simplified employee pension-IRA). As a sole-proprietor, you can contribute up to 20% of your net income from self-employment before you file for 2005.

For self-employed people, "net income" = your income ($32,000) minus the deduction for self-employment tax (approx $2200). So your maximum deductible contribution to a SEP-IRA for 2005 would be a little less than $6000. This contribution is fully deducible for income tax purposes at the federal level. (The 25% contribution applies if you are an employee, not the sole-proprietor of the business).

I know nothing about IRAs at ING.

Your question about the house is too complex to answer. It depends on your short term and long term financial situation and plan.

Also, please don't take my word for it and read up on the IRS publications. Consider consulting a tax professional experienced with self-employed individual returns.

[ZServe]

Thanks for the helpful responses...after posting I realized I was being lazy and spent quite awhile researching the issue. Everything I found seems to jive with tiltaholic's post.

One thing you guys might be surprised by is that I called the IRS 1040 hotline and asked to speak with someone about IRA's. They transferred me, and after explaining my situtation and being put on hold several times I was told that it is not possible to file as a professional gambler because "that would not be looked at as a job" and that I must put the income on line 21.(other income) After politely telling the rep that I was pretty sure he was wrong, he insisted that he was positive he was correct.

I was not surprised that he didnt know the answer to my question but I figured he would transfer me or tell me to talk to a CPA or something. So my advice is to be careful if you call the IRS for help, they dont seem to put a high priority on giving correct info.

[broiler]

The 1040 hotline is a terrible place to go for technical advice. Every year there is a report on an audit of the hotline and the percentage of correct answers is always shocking on the low side. They are only good at extremely basic questions.

Until you get to the level of audit supervisor or IRS attorney, you will have a hard time finding a person qualified to answer your question. I will give a little leeway to the local offices in the heavy gambling areas, since the people in those offices are reported very good since it is what they deal with on a daily basis.

[M3Trader]

Im a day trader and have a SEP IRA. Not sure the limits now, but it was up to $24k a year. I have to look into the % of income that is the max, but for a self employed person in any field, SEP is the way to go. Its deductable too each year so that is nice.

[Oak Bull]

SEP limits are 42k for '05 and 44k for '06.

[Oak Bull]

I'd skip the tax break this year (since you're not claiming much income) and use a Roth. When you are retired and drawing money from a 401k, IRA, Roth IRA, ect. you can't really hide your income as well, and will probably end up in a higher tax bracket. At that time, it's nice to be able to draw from the Roth tax-free. Withdrawls from traditional and SEP IRAs are taxable as ordinary income.

In your situation, I'd rather have a tax break on a large sum of money 30 years from now in a high bracket than write off a small amount now while in a relatively low bracket.