Hey fellow self-employed folks…did you have a good year last year? Facing an unexpected tax bill because you didn’t pay enough quarterly estimated taxes? (You were paying estimated taxes, right?)
It’s not too late to start a Simplified Employee Pension (SEP) plan. You have until the due date of your return including extensions (so that is all the way out to October 17th) to open and fund a SEP plan for your 2016 tax return. One of the really neat aspects of a SEP plan is you don’t always have to contribute, meaning if you have a good year, put money in. Business down the next year? Don’t contribute.
You can open a SEP plan at most financial institutions, including your local credit union. Think of a SEP plan as a container to hold investments. Those investments might be Certificate of Deposits (CDs), stocks, mutual funds, and other types of investments depending on what your bank offers. While you may not make the best of returns on these funds, the point of starting a SEP plan, besides planning for your retirement, is to lower your adjusted gross income (AGI) and pay less taxes.
Now, this is a retirement plan, so don’t plan on taking this money out until you retire or you face early withdrawal penalties. Of course there are other details, but it really is that simple.