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TAX TIP: STEP INTO A SEP?

April 09, 2007

If you started a new business on your own, or if you had a profitable moonlighting business on the side, you may be facing an unpleasant tax bill. You might be able to ease the tax pain by - figuratively speaking - taking money out of one of your pockets and putting it into another.

At this point, the easiest way to do that is to set up a Simplified Employee Pension plan, or "SEP." A SEP is a plan where an employer puts money into an employee's IRA. You can put up to 25% of your funds into an employee SEP and get a deduction, while the employee picks up no income. Of course this is most attractive when you are the only employee.

A SEP is easy to set up. All you need to do is complete a Form 5305-SEP and put it in your records, and fund your SEP-IRA by the due date of your return. If you extend your return, you have until the extended due date to set up and fund the plan.

The downside of a SEP is that if you have any employees, they have to get the same percentage of salary contribution that you have. As long as there are no employees, though, it can work very well.

If you want to set up the plan for the 2006 tax year, though, you need to get on the stick. You don't want to wait until the last minute to find a bank or mutual fund company to handle it. If you are down to the wire and you aren't sure what to do, it may be wise to extend your return so you can consider a SEP at your leisure, in consultation with your tax advisor.

The bottom line? It's still your money; it's just put away for retirement. You move it from one pocket to another, and you reduce your taxes by doing so.

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