Tax Season Retirement Savings Strategies For Procrastinators

8256628_sSo you didn’t get around to saving for retirement in 2015? There’s still time, thanks to rules that give you a grace period into 2016 to make 2015 contributions to an IRA, a Roth IRA, and for those with self-employment income, also a SEP-IRA. You could potentially sock away a total of $59,500 for 2015.

“Everyone’s looking for that last dollar of tax deduction, so the retirement plan contribution is wonderful from our standpoint; usually it’s a relatively big dollar amount, and it’s something they can do after the fact and have it go back and affect the prior year,” says Geoffrey Harlow, a CPA and partner at Kessler Orlean Silver in Deerfield, Ill.

Here’s a common scenario that plays out during tax season. Last year Harlow helped an executive laid off from a corporate job who became a consultant set up a SEP-IRA to shelter his consulting income. Many of the times the newly self-employed aren’t thinking of a retirement plan contribution, and they’re not even aware they can do it, Harlow says. “We make the suggestion, and they say, ‘I thought it’s too late;’ we play the hero; it’s not too late.”

The beauty of a SEP-IRA is that you can set one up for the prior tax year. You can open and fund the account until the due date for your 1040 individual income tax return, with extensions–meaning you can open one and make 2015 contributions until Oct. 15, 2016. Plus, you can do this for free or a minimal fee at most mutual fund outfits, brokers and banks.

Your annual SEP-IRA contribution, all of it pretax, can be as much as 20% of your net earnings, up to a maximum of $53,000 for 2016. That’s based on the amount you can contribute as an employer, as a percentage of your salary; the compensation limit used in the savings calculation is $265,000. (We’re assuming you operate as an unincorporated sole proprietor reporting your business earnings to the IRS on Schedule C. So that’s 20% of your net earnings after subtracting the one-half of your Social Security and Medicare taxes that are deductible.)

f you’re one person doing consulting then you’d want to maximize your SEP-IRA contributions and put in as much as you can, assuming cash flow allows it. If you have employees, there’s a catch. All the money you put into a SEP-IRA counts as an “employer” contribution, and you must make the same percentage contributions for all “covered” employees (other than your spouse). Covered, in this case, includes part-time employees who are at least 21 and who have been employed by you for at least three of the last five years and who earned at least $600 from you last year.

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