Depending on the kind of self-employment retirement plan you choose, you can make deductible contributions to it each year of 13% to 20% of your self-employed income. Some plans that can be used by people who own their own businesses are the simplified employee pension plan and the Keogh plan. Under the Keogh plan, also known as the money purchase arrangement, you are allowed to contribute up to 20% of your income per year. Under the simplified employee pension plan and the profit sharing Keogh plan, the contributions are limited to 13% of your income per year. Keep in mind, if you employ people, you also have to make contributions to their retirement plans.
The deadline for the setup and deposit of a Keogh plan is December 31st. For the SEP, the deadline is the date you file your tax return. If you file for an extension for your tax return, the deadline for your simplified employee pension plan may be the deadline of your extension.
The maximum contribution for money purchase arrangements is $30,000. The maximum contributions for profit sharing and SEP plans is $24,000. There is also another type of Keogh plan, known as a benefit defined plan, that carries with it a maximum yearly contribution of up to $130,000. This amount will be increased with inflation each year. The point of this type of plan is to have a retirement distribution equal to your current income.
The scope of this article was to familiarize you with the basic type of retirement plans available to those whom are self-employed. Now that we have acquainted you with the simplified employee pension plan, the money purchase arrangement, profit sharing and benefit defined Keogh plans, it is up to you to decide which most accurately reflects your needs.