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What About Retirement If I’m Self-Employed?Keogh plans were created to provide a tax-sheltered retirement option for self-employed taxpayers. They can provide some very attractive tax benefits. Unlike individual retirement accounts, which limit tax-deductible contributions to $3,000 per year, Keoghs allow you to save as much as $40,000 of your net self-employment income, depending on the type of Keogh plan you adopt. And you are allowed to have a Keogh plan in addition to another retirement plan such as an IRA. The money in a Keogh plan grows tax deferred until you withdraw it. When you withdraw these funds, you can take advantage of some of the tax-saving techniques — such as 10-year forward averaging — that aren’t available to IRA depositors. You can open a Keogh account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balances, most institutions set their own, usually between $250 and $1,000. Fees and commissions vary, so it makes sense to shop around. Deposit Deadline The deadline on a Keogh plan is sooner than it is for an IRA. You must open a Keogh by December 31 of the year for which you wish to claim a deduction. You don’t have to come up with your entire contribution by then, though. Much like an IRA, you don’t have to deposit your contribution until the day you file your tax return. That gives most taxpayers until April 15 to deposit their annual retirement savings into a Keogh account. Necessary Paperwork Unfortunately, the paperwork that is required to open a Keogh account is cumbersome. You’ll be required to fill out forms that ask very specific questions about your business, your Keogh plan’s vesting schedule, and the appointment of an administrator of the plan. You may want to use the services of an accountant in filling out these initial forms. Unless certain exceptions are met, Keogh owners must also file disclosure Form 5500 or 5500-EZ annually. Some banks and brokerage houses offer their customers written advice on filling out these forms. If you’re self-employed on either a full- or part-time basis, a Keogh plan could be a valuable addition to your retirement strategy. And the potential payoff — a comfortable retirement — may far outweigh the extra paperwork. © 2003 Emerald Publications |
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