On Friday, I sat down with my accountant to begin preparing my 2009 tax forms.  While I hate doing my taxes, I was very pleasantly surprised about being able to open a simplified employee pension plan (SEP) to lower my taxes.  By putting money into a SEP retirement account, I can lower my taxes by about $1,500!!

While I have heard about SEPs, I always thought that I couldn't open one because my full-time job provides a 401(k) plan.  But, it turns out that since I own a side business, it doesn't matter that my primary employer has a 401(k) plan.

All year I have been beating myself up over not maxing out my 401(k).  I didn't want to lower my 401k contributions, but I was scared that I might get laid off, so I built up a sizable emergency fund.  Now I am feeling more secure in my job situation, so I can pull money out of my emergency fund to fund a Simplified Employee Pension Plan.

What is a Simplified Employee Pension Plan?

A SEP is a retirement account for the self-employed or small business owners.  It works very much like a traditional IRA where the contributions are tax deductible.  The money in the SEP IRA is then taxed on withdrawal.

Advantages of a SEP IRA

1. Allows small business owners much higher contribution limits than traditional IRAs - 25% of net income, with a cap for 2010 of $49,000
2. Allows small business owners to create simplified pensions for their employees.
3. You can contribute to a SEP any time of the year, including up to April 15 of the next tax year.
4. You can open a SEP IRA at almost any bank, mutual fund company or brokerage firm.
5. You can open a SEP IRA even if your primary employer has a 401k.

Start a Side Business

I cannot recommend enough starting a side business.  There are so many benefits.  Now I find out that a SEP IRA is just own more benefit.

Over the last three years, I have been building an online business in my part-time after work.  This side business has been awesome for me.  Now it is allowing me to open a SEP IRA and save even more money on my taxes.

In a future post I will explain my side business, but for purposes of this post, I wanted you to know that if you have a side business a SEP IRA might be a great retirement account to lower your tax liability.

A SEP IRA is super easy to open - it takes about an hour.  I am still deciding where to open my SEP.  Right now I am considering a Vanguard SEP, Fidelity SEP or a SEP through my bank.

Do you have a SEP?  If so, I would love to hear your thoughts about them.

Related posts:

1. 7 Great Ways to Save A Raise
2. Flat Tax – Fair Tax
3. No Perfect Plan For Getting Out Of Debt

This week I read a great article at Financial Samurai titled Tell Us Why The Flat Tax System Isn't Fair.  In it, Financial Samurai explains very well why the flat tax is a fair tax.  While you should go to his site to read his reason, I thought that I would raise some more reasons why Congress should pass the flat tax.

Stop Using the Tax Code to Regulate People

While most flat tax opponents prefer a progressive tax system because people who make more money are taxed at a higher tax rate, I think that in many ways the current progressive tax system helps the very rich at the expense of the middle class.

The US tax code provides all kinds of ways to lower your taxes, but typically the wealthy are the ones who can afford to take advantage of these tax breaks.  One example is the tax break available for investment property owners.  These landlords can deduct all kinds of expenses from their taxes.

Instead, let's simplify the tax code by stating that everyone has to pay 15% of their income in taxes.  But, let's stop giving tax breaks as a way to engineer the economy.  There are enough benefits for owning a house without having tax deductions on mortgage interest.  Let's stop giving tax breaks for buying "energy efficient" cars.  How crazy is it that someone can get a tax credit for buying a hybrid Yukon because it is a hybrid, even though it gets worse gas mileage than my Honda Accord. Rant over. LOL

Too Many People Pay No Taxes

Another problem that I have with the current tax code is that too many people pay nothing in taxes.  Don't get me wrong, I don't want the indigent to have to pay taxes, but everyone above the poverty line needs to pay something.

We can't have a society where half of the population pays nothing.  This really hurts the middle class.  As more and more people are taken off the tax rolls, middle class families need to pay more.  Instead, government needs to cut its budget, become more efficient, and lower taxes for everyone.

We Need A Simpler Tax Code

The main reason that we need the flat tax is that it would greatly simplify doing your taxes.  If you make $100,000, then send $15,000 to the government.

This is the way my State of Pennsylvania does it.  In fact, most states have a flat tax.  We could greatly reduce the IRS budget if the tax code was simplfied.

So, go check out the Financial Samurai's article.  It is well done and the comments are great.

Related posts:

1. Increasing Government Financial Aid Hurts Students
2. Americans Should Be Outraged by Union Health Care Deal