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:
- Enter profit from Schedule C of tax return;
- Subtract one half of self-employment tax;
Multiply the result by the "net contribution rate" listed in the IRS table:
ADD IRS TAX TABLE - PAGE 20 PUBLICATION 560
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.