If you received a filing extension for your 2005 tax return, you may be able to reduce last year’s tax bill. That’s the case if you (or your spouse, if you file jointly) had any self-employment income to report for last year.
In such a situation, you have until October 16–the due date for filing your tax return–to create and contribute to a simplified employee pension (SEP) plan for last year. Such plans require little paperwork; most banks, brokerage firms, and mutual fund companies will help you meet the deadline.
Tax-deductible contributions to a SEP can be as much as 20 percent of self-employment income, to a maximum of $42,000 for 2005 ($44,000 in 2006). Once you have made the contribution, you can invest the money in virtually any type of savings account or security. Because they are tax-deferred, SEP plans may be good places to hold investments such as Ginnie Mae mutual funds, which pay relatively high yields but offer no tax shelter for these distributions.
