Posted by Keith Hall (National Tax Advisor) - Investing in your own future is always a good idea, but it’s even better knowing that Uncle Sam will help by making qualified retirement plan contributions tax deductible. Congress and the IRS will actually let you pay less tax simply for investing in your own future. Only in America!
So which plan is right for you? There are lots of options to choose from, including making a contribution to a traditional IRA, setting up a 401(k) plan for your business, and setting up a Simplified Employee Pension Plan. Most of us can contribute up to $5,000 to a traditional IRA and get a deduction for the full $5,000. Setting up a 401(k) plan could allow you to make even a larger contribution, but may be a bit more expensive to set up. The Simplified Employee Pension Plan, or SEP Plan, may sound more complicated but is as easy to set up as opening a new bank account and will allow you to contribute up to 20 percent of the net earnings from your business. Further, the SEP contributions can even be made as late as the extended due date of your tax return, which gives you up to six more months to make that investment in your future and still save taxes on last year’s return.
As you can tell, the SEP Plan is my favorite, but the most important thing is that you do something. Whichever plan makes the most sense for you, just do it. Even if you can’t make the maximum contribution, find some way to invest something in your own future via that retirement contribution. When it's time to complete your tax return, you will be so glad you did.