What About Retirement If I'm Self-Employed?

Keogh Plans were created to provide a tax-sheltered retirement option for self-employed taxpayers, and they can provide some attractive tax benefits.

Unlike individual retirement accounts, which limit tax-deductible contributions to $4,000 per year (in 2007), Keoghs allow you to save as much as 25 percent of net self-employment income up to $45,000 per year, depending on the type of Keogh plan you adopt. And you are allowed to have a Keogh plan in addition to another retirement plan such as an IRA.

You can open a Keogh account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balances, most institutions set their own, usually between $250 and $1,000.

Fees and commissions vary, so it makes sense to shop around.

Deposit Deadline

The deadline on a Keogh plan is sooner than for an IRA. You must open a Keogh by December 31 of the year for which you wish to claim a deduction.

You don't have to come up with your entire contribution by then, though. Much like an IRA, you don?t have to deposit your contribution until the day you file your tax return. That gives most taxpayers until April 15 to deposit their annual retirement savings into a Keogh account.

Necessary Paperwork

Unfortunately, the paperwork that is required to open a Keogh account is somewhat cumbersome. You'd be required to fill out forms that ask very specific questions about your business, your Keogh plan's vesting schedule, and the appointment of an administrator of the plan. You may want to use the services of an accountant in filling out these initial forms.

Unless certain exceptions are met, Keogh owners must also file disclosure Form 5500 or 5500-EZ annually.

Some banks and brokerage houses offer their customers written advice on filling out these forms.

If you're self-employed on either a full- or part-time basis, a Keogh plan could be a valuable addition to your retirement plan. And the potential payoff — a comfortable retirement — may far outweigh the extra paperwork