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Types of Retirement Plans - Keogh Plans (HR-10)

A Keogh plan is a qualified retirement plan for self-employed individuals. It may be either a defined-benefit or defined contribution plan. Self-employed individuals for the purposes of a Keogh plan are the owners of unincorporated businesses, including sole proprietorships and partnerships.

Contributions to a Keogh plan are tax-deductible and earnings accrue on a tax-deferred basis.

The details of how a Keogh plan operates are governed by the type of qualified plan it operates as, such as a defined-benefit plan or a profit-sharing plan.

  • Deduction limit - The limit on deductible contributions to a qualified plan for self-employed individuals differs somewhat from the usual limits. The net earnings of the self-employed person is used to determine the contribution limit as opposed compensation as used with regular employees. This results in a lower contribution rate for the self-employed person compared to employees.
    • Net earnings - Gross income from trade or business minus allowable business deductions, including the deduction for retirement plan contributions.
    • Calculation of Keogh deduction ­- There are three steps:
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Notice from the table above that the maximum net contribution rate for the self-employed is 20% of net earnings. That figure is a good guideline for determining contributions for self-employed individuals.

Regulatory considerations
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