If you have self-employment income, then you can take a tax deduction for contributions you make to a SEP, SIMPLE, or Keogh retirement plan. You must open and contribute money to a SEP-IRA plan by the due date of your tax return, including extensions. If you request an automatic extension, you will have until October 15th, 2009, to fund your SEP retirement plan for 2008. However, SEP IRA accounts must be set up by April 15th, 2009, if you are thinking about making a contribution for 2008.
SIMPLE plan: Because it is a deferral of compensation a SIMPLE has lower contribution limits. The maximum contribution you can
make to a SIMPLE for 2008 is $10,500, plus an additional $2,500 if the “employee” will be age 50 or older at the
end of 2008. For 2009 the basic maximum jumps to $11,500, with the same additional $2,500 “catch-up” contribution allowed.
SEP IRA: For 2008 one can contribute up to $46,000 to a SEP. This is increased to $49,000 for 2009. The
amount of the contribution is 25% of “compensation.” For the owner of a Schedule C business this translates to 20% of the
net profit on the Schedule C or C-EZ less the “above-the-line” adjustment to income for 50% of “self-employment tax.”
Keogh: The maximum contribution to a Defined Contribution Keogh Plan, like the SEP IRA, is 25% of
compensation, up to $46,000 for 2008 and $49,000 for 2009. As with the SEP, this translates to 20% of the net profit from
the business less the adjustment to income for 50% of self-employment tax.
You must have self-employment income. Self-employment income consists of net profits from a Schedule C or Schedule F, or guaranteed payments from a partnership. Additionally, you must set up and fund a qualified retirement plan, such as a SEP-IRA, SIMPLE-IRA, or Keogh-type pension plan. If you run an S-Corporation, your corporation will have to set up the SEP-IRA and deduct your contributions from your W-2 salary.