Pay Yourself First and Reduce Your Taxes: Retirement Saving Plans

Pay Yourself First and Reduce Your Taxes: Retirement Saving Plans

There are several ways to defer taxes on current income that have strings attached. The most popular are the retirement savings plans. By saving money in a Retirement Savings Plan now, like a SEP-IRA or Individual 401 (k), you can reduce your taxable income in the current year.

Congress has been adding to and changing the rules on existing retirement plans trying to increase the US savings rate. The good news is you can get more bang for your buck as self-employed than you can as a regular employee when it comes to getting your retirement savings to reduce your current year’s income taxes. To get more information see IRS Publication 560, Retirement Plans for Small Businesses.

Briefly, options are the traditional and Roth IRAs, SEP-IRA, Qualified Plans, and the new individual 401 (k). For example, the maximum contribution for the Individual 401 (k) is $44, 000 in 2006 (subject to income limitations). That will go a long way to reducing your tax liability. Be sure to check the requirements deadlines for setting up and funding the plan and the limitations on withdrawals before you get started. Usually any withdrawal prior to the year you turn 59 & ½ are subject to a 10% penalty. Each plan has different rules for exceptions to the 10% penalty rule.