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Should you start a qualified retirement plan before year-end?

December 16, 2009

The tax law has a menu of tax-favored retirement plans for entrepreneurs. The simplest ones, SEPs and IRAs, can be set up for 2009 as late as the tax return deadline -- in the case of SEPs, the extended tax return deadline. But the most potentially lucrative plans -- qualified pension or profit-sharing plans -- have to be in place by year-end for contributions to be deducted on 2009 returns.

For a profitable entrepreneur with no employees, the "Solo-401(k)" may be the most lucrative retirement plan option. If you are profitable enough, you can make a deductible 2009 contribution to such a plan of the first $16,500 of your earnings, plus 20% of your earnings, if you are a Schedule C entrepreneur. The $16,500 piece makes for bigger contributions than would be available from SEPs or other plans for those with earnings under $245,000. That's a nice deduction for just taking money from one pocket and putting it in your other pocket.

If the plan is fully executed in 2009, it can be funded as late as the extended due date of your 2009 return.

There are downsides to such plans. They are much more expensive to maintain than a SEP, and the benefits either have to be foregone or shared if you add employees. You don't want to just jump into a qualified plan, but if you want to look into one for this year, you need to act quickly.

This is another installment in the 2009 Tax Update year-end tax tip series.