Maximum Keogh Contribution for owner/employer

[Guest ELZ]

What is the maximum contribution an owner employer can make to a Keogh. Is it 25% of income?

Thanks for your help.

[Kathy]

You would think that would be a simple question to answer, wouldn't you? Well, here goes - First of all, it depends upon your plan. The deductible limit for a Profit Sharing is 15% of "Earned Income." The deductible limit for a Money Purchase is whatever the document requires as a contribution up to 25% of "Earned Income."

And what is "earned income"???? To oversimplify, it is your net business income minus 1/2 your self-employement tax and minus your retirement plan contribution. Since you need to know your earned income to figure your contribution and you need to know your contribution to derive earned income, you need algebra - my least favorite subject. Divide the earned income before the contribution by 1+ the plan's contribution rate and that will give you "earned income". Mutliply that by the plan rate and you'll have your contribution. It's easier to remember that 15% is 13.04% of earned income before the contribuion and 25% is 20%.

Hope that helps.

[Guest JF]

If your Keogh is a defined benefit plan, you could far exceed the 25% depending on the owners age. Keep in mind that a Keogh is a general term that covers qualified retirement plans for companies that are not incorporated. All the same plan design options such as profit sharing, money purchase, defined benefit, target benefit are available with the same rules as they would for a corporation. However, as Kathy pointed out, because of the way income is paid to the owner, defining income is not as simple as looking at the W-2 in a corporation.