Saving Plans

Socking Away As Much as You Can

Savings plans that every entrepreneur should consider

As many self-employed workers have found, simplified employee pension plans or SEP-IRAs are simple and flexible. The plans allow anyone who made a determined sum in self-employment to make tax-deductible contributions of up to 15 percent of earned income each year, with a determined maximum. You can change the amount you contribute each year – or skip a year if you need to.

Like regular IRAs, SEP-IRAs generally require no complicated tax filings, you just deduct the amount you contributed on your income tax form. Yet you can contribute much more to a SEP-IRA than to a regular fond, and SEP-IRA contributions are fully tax deductible. If you put $2,000 a year for twenty years in an IRA earning 8 percent, for example, you’d get $98,846. But if you put away $5,000 annually in a SEP at the same rate, you’d have $247,115. If you have employees, you must contribute the same percentage as you contribute for each employee’s earned income.

Keoghs are geared to small business owners such as engineers, attorneys or accountants. They require more paperwork than SEP-IRAs to administrate but they also allow you to contribute a higher percentage of earned income.

Whatever savings plan you choose, be sure you choose one. Photo: Megan Jorgensen (Elena)

Keoghs come to three different types: Profit Sharing, Money Purchase, and Paired Plan. Profit-Sharing plans are flexible but, like SEP-IRAs, offer the lowest annual contribution percentage – up to 15 percent of earned income each year up to $30,000 per participant. They vary the percentage of earned income you contribute each year and let you skip a year if necessary.

Money Purchase plans allow contributions of up to 25 percent of earned income, up to a determined sum per year per participant. You specify a fixed annual contribution percentage when you set up the plan and must contribute each year. Paired plans are attractive if you want the maximum annual tax deduction and can afford to make the maximum contribution.

Whatever plan you choose, be sure you choose one.