*Update: Find tax year 2007 and 2008 SEP-IRA contribution limits here
If you are self employed, own a small business, or even just earn some extra income on the side - this tax tip might help you…
A Simplified Employee Pension Plan, more commonly known as a SEP-IRA, allows you to deduct up to 25% of your compensation, up to $44,000 for the 2006 tax year. The SEP-IRA has only been around a few years, and is an excellent way for self employed people and small business owners to get a nice tax break and put away more money for retirement. On top of taking that big tax deduction, any investment earnings in your SEP-IRA grow tax-deferred until they are withdrawn.
You can still make a 2006 contribution to a SEP-IRA, since the deadline for 2006 contributions is tax day 2007. There is no annual contribution requirement, which means you make a contribution for 2006 and can then choose to make contributions for years where it makes sense for you. Every year you can contribute 0%-25%. The SEP-IRA is very simple to set-up (similar in complexity to a ROTH-IRA) and there is not complicated annual reports to submit to the IRS. If you made any self-employed or small business income last year and are looking for a way to reduce your tax burden: check out the SEP-IRA! Here is some info provided by the IRS…but before you decide the SEP-IRA is right for you, it is a good idea to talk this over with a tax professional.
Lets say last year your business did $100,000 in profit. (a nice round number) If you chose to make a 20% contribution of your earned income - the total contribution amount would be $15,489. To get that amount, I used this SEP-IRA contribution calculator.
To see how the math works on figuring that contribution (it is a little tricky), below are the results from that calculator for $100,000 in profit at a 20% contribution percentage.
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5 responses so far ↓
1 Scott Polk // Apr 25, 2007 at 10:54 am
Great post Todd … I will have to use this next year
2 Todd // Apr 25, 2007 at 4:48 pm
Scott: Taxes=Bad
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