Your Own Boss? Take An Ira Tax Break

Even if you're racing to gather last year's tax data for the Apr. 15 deadline, you still have time to safeguard a healthy chunk of 1990 income from the Internal Revenue Service. It's possible if you earned money from your own full-time or sideline business.

Anyone who is self-employed can qualify for a retirement program that combines features of the familiar Keogh and individual retirement account (IRA) plans. Called a SEP-IRA, it can provide you with an immediate deduction and future tax-deferred investment growth. The acronym stands for "simplified employee pension individual retirement account."

Although the deadline for funding a regular IRA is Apr. 15, you can open a SEP-IRA on that date or anytime before Oct. 15 if you request the necessary filing extensions. In any case, you still can take a deduction for 1990. To pay 1990 income into a Keogh, you had to have established one last year.

To set up a SEP-IRA, you merely complete a single form (5305-SEP) with your broker, banker, or insurance agent. Nothing gets sent to the IRS, and no annual filing is required. All you do is report each year's deductible contribution as an adjustment to income on your 1040. Expect an annual management fee of about $30.

The pretax dollars you set aside can't exceed 15% of the net profit from your business. And the law limits the net you can consider to $200,000. So the most you can contribute and deduct is $30,000--the same maximum self-employed taxpayers can pay into a defined-contribution Keogh. (You can invest larger sums in a defined-benefit Keogh, which sets specific retirement payouts.)

Another distinction: A SEP-IRA doesn't require an annual contribution, as some Keogh plans do. You can put in as much (up to the limit) or as little as you wish in any year. As with a regular IRA, you can invest in mutual funds, CDs, zero-coupon bonds, or other instruments. And you can open a SEP-IRA even if you already have a regular IRA or a Keogh. (But if you do, check with your tax adviser on filing requirements and the percentage of income you can contribute to each.)

PENALTY TAX. SEP-IRAs are simpler to administer than Keoghs and are most beneficial to individuals who work alone. But they can present problems for small-business owners with employees. Owners who establish SEP-IRAs for themselves may also have to set them up for some employees who earn as little as $300 a year. That means part-time workers may qualify. On the other hand, an employer who establishes a Keogh plan need only make contributions for full-time workers.

Once your untaxed SEP-IRA dollars are squirreled away, the same rules that govern other qualified retirement plans apply. For example, you'll pay a 10% penalty tax on money withdrawn before age 59 1/2. Otherwise, Uncle Sam won't get to lay a hand on the funds until you take them out.

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