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Keogh Plans
H.R. 10 Plans

A Keogh plan is a defined-contribution retirement plan for self-employed persons and their employees, including sole proprietorships and partnerships.

If you have earned self-employment income through your performance of personal services, you are eligible to set up a Keogh. As far as these types of accounts are concerned, your net profit income is considered (gross income minus deductions). Income earned overseas is not considered self-employment income. If you are an inactive owner in a business (i.e. limited partner or retired partner) you cannot contribute to a Keogh plan. If you own more than one business, you must set up Keogh plans for all of them. These plans can be incorporated into one, or remain separate, but it is not permissible for a person to contribute to a Keogh for one business and not another. If you have both self-employment income as well as employment income, you can have a Keogh plan. Being an employee and self-employed does not preclude the opportunity to set up a Keogh.

The maximum amount you can contribute to a Keogh depends on whether it is a defined contribution or defined benefit plan. For defined-benefit plans for 2005, employers may contribute up to an amount that would fund a pension of the lesser amount of $170,000 or 100% of the average compensation for an employer over his/her highest consecutive 3-year period.

For defined-contribution plans for 2005, employers may contribute up to the lesser amount of $42,000 or 100% of compensation, subject to an annual compensation limit of $210,000. At the employer level, no more than 25% of the covered compensation of all participants may be deducted. So of the Keogh plan covers only one participant, the effective contribution limit becomes 25% of the net after-contribution income of the business owner, not to exceed $42,000.

Setting up a Keogh plan is fairly easy. The employer (including self-employed individuals) can adopt a generic master or prototype plan already approved by the IRS. The IRS-approved plans can be provided by banks, trade or professional organizations, insurance companies and mutual funds. If you are a regular employee working for an employer with a Keogh plan, you simply have to contribute to the extent allowed under the plan.

Last Updated: 9/23/2012 10:05:00 PM