As we head into the final month of 2011, now is the time to start acting on year end tax saving strategies. For those that are self employed or have a side business, the savings can be significant by contributing to a tax friendly retirement plan now or or before April 16, 2012 (April 15th is a Sunday).
The Cheapest Option is to Open a Solo 401(K) Plan
It would be wise to open a solo 401(K) plan granted you don’t have any employees other than your wife. You can personally contribute up to the lesser of $16,500 or your earnings plus 20% of your net self employment income for a total of $49,000 and if you’re older than 50, your limit is raised by $5,500 to $54,500. One of the best features of this plan is that the cost to setup is minimal at $0 to $100 or so and the annual fee is only $10 to $250 depending on the provider.
Is the solo 401(K) still the best option if I have a full-time job and have a side business?
No, in that case a SEP IRA account may be a better option. You can personally contribute up to the lesser of your earnings plus 20% of your net self employment income for a total of $49,000. The contributions to your SEP IRA also don’t interfere with your current employer’s 401(k) plan. You would not be able to double up on your contributions if you had a solo 401(k) plan. One caveat is that SEP IRAs don’t have the catch-up provision (i.e. additional $5,500) for those 50 and older. Also, this plan can get pricey if you decide to hire employees because you need to match the contributions for all covered workers.
Do I need to contribute to the account by year end?
You don’t have to contribute to the account until you file your tax return in April or October if you file an extension but you must have established a solo 401(k) plan before the end of this year in order to deduct the contribution on your 2011 tax return. However, if you plan to setup a SEP IRA, you can wait until April 16, 2012 or October 15, 2012 if you plan on filing an extension.
More Tax Questions? Ask a CPA your Tax Questions.
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