A self employed person can establish a Keogh Plan, simplified
employee pension (SEP), or SIMPLE
Plan and make tax
deductible contributions entered on Form 1040, Line
28. SEP's and SIMPLE's are less complicated than
Keogh's. The tax deductible contributions and any interest
or gains thereon are not taxed until withdrawn.
A self employed person can establish and make tax deductible
contributions to a Keogh Plan even if the person
additionally works as an employee and is covered by that
employers tax qualified retirement plan. You can also
establish an IRA under the same tax rules as other
The two types of Keogh Plans are defined contribution plans
and defined benefit plans. Retirement benefits received from
a defined contribution plan are based on the tax deductible
contributions and accumulated interest and gains. Retirement
benefits received from a defined benefit plan are based on a
benefit formula. Tax deductible contributions are adjusted
to provide the required benefit.
The maximum tax deductible contribution to a defined
contribution plan is the lesser of $49,000 or 100% of
The maximum tax deductible contribution to a defined benefit
plan is the amount needed to produce the required benefits
under the formula. For 2009 the
maximum annual retirement benefit which may be funded may
not exceed the lesser of 100%of
the participant's average compensation for the highest three
consecutive tax years as an active participant; or, $245,000.
Provided the Keogh Plan is established by the last day of
the tax year, you can make tax deductible contributions up
to the due date of your tax return.
Many other tax rules apply and you should seek the help of a
qualified professional before establishing a tax deductible