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:

• Keogh plans - defined benefit, defined contribution, or hybrid retirement plans set up by a self-employed person or partnership. Common types of Keogh Plans include money-purchase plans and profit-sharing plans.
• Simplified Employee Pensions (SEPs) - a very flexible, easy plan to set up that involves making contributions to special Individual Retirement Accounts (IRAs) set up for the business owner and each eligible employee.
• SIMPLE plans - a relatively new type of simplified retirement plan, the Savings Incentive Match Plan for Employees (SIMPLE plan, which allows employees to make elective contributions of up to $7,000 per year in 2002 ($8,000 in 2003) and requires employers to make matching contributions.
• Individual Retirement Accounts (IRAs) - the easiest solution to retirement savings, although your contributions are limited to $3,000 per year in 2002.