Self-Employed Can Still Cut 2015 Taxes with a Retirement Plan

Self-employed people—from Uber drivers to high-powered consultants—need to save for retirement, and a tax-advantaged retirement plan is the best way.
ReKeithen Miller
Published: April 14, 2016

If You Haven’t Filed Your 2015 Return, You Can Get Deductions for Contributions until October


Self-employed people—from Uber drivers to high-powered consultants—need to save for retirement, and a tax-advantaged retirement plan is the best way. Designed for the self-employed, the Simplified Employee Pension (SEP-IRA) and the Solo 401(k) are relatively easy to set up. Both plans offer tax-deductible contributions, enabling you to cut your taxes and get tax-deferred growth.  

Another plus: you can still reduce your 2015 federal income taxes because either plan allows you to contribute up until your tax-filing deadline, including the six-month extension. If you got an extension and haven’t filed your return yet, you have until Oct. 17, 2016 to make 2015 contributions to your plan.
However, while a SEP-IRA can still be established up until October 17, 2016, those who wish to make a profit-sharing contribution to a Solo 401(k) must have established the plan by December 31, 2015.

Which plan is best for you? Here are the main features and the pros and cons of each.

A SEP-IRA is similar to a traditional IRA. Investment earnings grow taxed-deferred until withdrawal, but self-employed individuals can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are the lesser of 20 percent of net business income or $53,000 for 2015.

Banks, insurance companies and brokerage firms offer SEP-IRAs, which often can be opened up on the Web. Make sure the sponsor offers a range of solid investment options. 
One caveat: if you have employees, you must contribute the same percentage of salary for them as you do for yourself. If you can’t afford to or don’t want to do that, a SEP-IRA isn’t the best plan for you.

Since SEP-IRA contributions are deemed to come from the business, not the individual, a participant can also contribute to a Roth IRA in the same year he or she makes a SEP-IRA contribution.

By contributing to both, you can take advantage of tax-free Roth IRA growth and increase the tax diversification of your retirement savings and have more flexibility when you’re taking out money during retirement.  



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