Deducting Retirement Contributions

One of the best ways to reduce your tax bill, while increasing your net worth and future security is to invest in a retirement plan. When you own the show, you're in a position to tailor-make a plan that suits your needs precisely. If you set up a plan that meets the IRS requirements, you can make tax-deductible contributions to the plan, which will build up tax-free until you withdraw them.

As a self-employed business owner, your major retirement plan options are:


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Beginning in 2002, small employers with no more than 100 employees will receive a tax credit for some of the costs of establishing new retirement plans. The credit equals 50 percent of the start-up costs incurred to create or maintain a new employee retirement plan. The credit is limited to $500 in any tax year and it may be claimed for qualified costs incurred in each of the three years beginning with the tax year in which the plan becomes effective.

To further encourage low- and middle-income taxpayers to save for retirement, a temporary nonrefundable tax credit has been created for contributions made by eligible taxpayers to a qualified plan for tax years 2002 through 2006. The maximum credit available is $1,000 for a $2,000 contribution.

Also beginning in 2002, taxpayers can look forward to greater retirement plan contribution limits and higher tax deductions for employer contributions to certain retirement plans. So if you are thinking about setting up a retirement plan for your business, 2002 would be a good year to start.

Reporting retirement plan contributions. If you are a sole proprietor, contributions made for employees to a Keogh plan, an SEP, or a SIMPLE plan are reported on Line 19 of Schedule C, "Pension and profit-sharing plans."

Contributions made to the plan on your own behalf would be reported on Line 29 of your Form 1040, "Keogh and self-employed SEP and SIMPLE plans."

There are also some special tax reporting requirements with regard to the Keogh or other retirement plan itself. Generally, an annual report on IRS Form 5500-C/R (for plans with fewer than 100 participants) must be filed with the IRS by the last day of the 7th month after the close of the plan year. Single-participant plans can use Form 5500-EZ. See the instructions for these forms (available from the IRS by calling 1-800-TAX-FORM, or at its website or see your professional tax advisor.

IRA contributions. If your IRA contribution is deductible, you don't need to file any special forms to claim it, nor do you need to itemize your deductions on Schedule A of Form 1040. Simply write the amount of your contribution (and your spouse's contribution, if married filing jointly) on Line 23 of Form 1040, or Line 16 of Form 1040A.

To report any nondeductible IRA contributions, you must file IRS Form 8606, Nondeductible IRAs, with your tax return.

Business Tools

Among the Business Tools are Form 1040, Form 1040A, Schedule A and Schedule C. They are in Adobe Acrobat .pdf format, and you will need Acrobat Reader 4.0 to view the files and print them. Acrobat 4.0 is available at no cost in the Business Tools area as well.