I have spent the last few hours working on my income tax return. In an effort to decrease my tax liability for 2007, I have opened a SEP-IRA. A SEP-IRA (Simplified Employee Pension) can be established and funded by a self-employed owner of a business. Since ‘No Credit Needed’ managed to make a little money in 2007, I can make contributions, on my own behalf, to a SEP-IRA.
For more information on SEP-IRAs, please see the IRS website or this article from Investopedia.
I used this handy calculator from Vanguard to calculate how much I can contribute to my SEP-IRA for 2007.
According to multiple resources, sole proprietors have until April 15th, or their extension deadline, to make contributions if they want a tax deduction for the prior year.
The real problem that I have – right now – is that I have been trying to rebuild my non-retirement savings AND fully-fund my son’s ESA for 2007. Adding the SEP-IRA at such a late date is really going to slow my savings progress – and could even jeopardize my ability to fully-fund his ESA. But, I think that I can manage to fully-fund the ESA AND contribute to the SEP-IRA, if I slow my non-retirement savings.
I have decided to hold off on actually filing my taxes until April – so that I can have a little longer to contribute as much as I can to the new SEP-IRA. I hate the idea of slowing my non-retirement savings progress, but I hate the idea of paying taxes even more!
Please note: I am not a tax-professional, and I most certainly do not play one online. Please, before you make any decision about your taxes, consult a qualified tax-professional.
Hi:
I am a CPA and also use a SEP…you know that rule said you can contribute UNTIL April 15 OR the extended due date of you return….You can request an automatic extension until Oct 15th and have until that time to make your contribution. However, you don’t have to wait to file your taxes until you have funded your SEP….just fyi…
Jodie,
Thanks for the info! If I understand it correctly, I can file for an extension, but I must PAY any amount that I owe by April 15th, correct? Now, if I wait until October to file, do I just put on my tax form that I EXPECT to fund the SEP by then… and thus reduce my taxes? Do you see what I’m asking? If I can’t make the contributions by April, can I just put the amount that I plan to contribute… and then contribute before I actually file?
NCN
Thanks for the very informative information on SEP IRA’s……….I have heard of them before but didn’t know the details until reading this article.
If you’re a sole proprietor, a SE401K is better than a SEP-IRA; you can put your first $15,500 into a SE401K, but a SEP is a straight percentage up to the maximums.
If you are trying to shovel the maximum amount into tax-deferred accounts, a SE401K is better.
SE401Ks are _NOT_ employer 401Ks – they are pretty much identical to SE401Ks in terms of paperwork, although there are fewer brokerages that have them. (The main one is Fidelity).
My wife has had a SE401K for several years and has put, on average, about 40% of the profits from her business into it each year.
Here’s my blog post on SE401Ks versus SEP-IRAs. It’s a bit old, so the numbers are slightly out of date, but still basically valid.
Put on your tax form the amount you WILL put into the SEP. I guess you need to know now what amount you will put in…but you are a financial genius, right?! 🙂
One more item…the SE401K needs to be set up before year-end so you can’t use it for 2007. It is a good way to put the money away though. I haven’t heard what the fees for these are though…In my experience the traditional 401k is pretty expensive to set up, I don’t have any info on the SE401k. Thanks for the blog post from Foobarista, it had good info in it…
Please note that the limits stated above are for those under 50. The limit in 2008 for those 50 or older is $51000. There will be minimal paperwork required until you hit $250,000 in assets. Fidelity’s SE401K is easy to open up but you will need to get a federal id first. Fidelity will tell you how. Be sure to open your plan by 12/31, I previously had a SEP plan and after researching the newer SE401K a couple years ago, found that the SE401K is a much better plan if you want to sock away the most money during the year.