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IS A QUALIFIED PLAN A GOOD MOVE BY YEAR-END?

December 12, 2007

Most year-end tax planning moves require you to write a check before the end of the year to get a deduction. For business owners, there is one year-end tax planning move that doesn't need to be funded until as late as next fall: a qualified retirement plan contribution.

A qualified plan can be especially attractive to a self-employed businessman. If you are the only plan participant, a contribution to your plan gives you a tax deduction for taking money from one pocket and putting it in another. With a "solo 401(k)" plan, you can contribute the first $15,500 of your pre-tax business income to the plan - or up to $20,500 if you are age 50 by December 31 (but not if you have another 401(k) plan from another job). You might even be able to put in more than that, to a maximum of $45,000; you can make a profit sharing contribution to the extent it, when added to your 401(k) contribution, doesn't exceed 25% of your pre-tax income.

There is a catch. While you don't have to fund a 2007 plan contribution until the due date of your tax return - including extensions - you have to have the plan in place by the end of your tax year. If you want to put a plan in place by the end of this year, you need to move quickly.

Link: Kiplinger: SEP vs. Solo 401(k)

This is the third in a daily series of year-end planning ideas that will run through December 31. Collect them all!

Tags: year-end tax planning.