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Holding Off the Day of Reckoning: Deferring Income for Small Business Owners – Keogh and Alternatives

Tax law permits many kinds of retirement plans, each with its own complications. Negotiating the maze is aided by J.K.Lasser’s Your Income Tax 2005, which looks at multiple variations.


February 16, 2005 - While the powers that be in Washington debate how the country should deal with the Social Security system and private accounts, small business owners have to make their own decisions about funding retirement. From a tax viewpoint, this is all about deferring tax from the present to the future, and meanwhile compounding your earnings pre-tax.
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Tax law permits many kinds of retirement plans, each with its own complications. Negotiating the maze is aided by J. K. LASSER’S YOUR INCOME TAX 2005, which looks at multiple variations.

The classic small business retirement plan since 1962 has been the Keogh plan (named for its Congressional sponsor, Rep. Eugene Keogh of New York City) for the self-employed and partnerships. Keogh plans can be used by self-employed individuals or partnerships with any number of employees to make greater contributions than individual IRA’s permit.

Legal Tip: For tax purposes, “partnership” includes general and limited partnerships, as well as a multi-owner limited liability company (LLC) or limited liability partnership (LLP). LLC’s and LLP’s can also be single-owner enterprises; these are not tax “partnerships” and are taxed on the owner’s individual return. No matter how owned, LLC’s and LLP’s achieve broad limitations on liability under state law without incorporating, and all can use Keogh plans.

Keogh plans come in two basic types:

  • Defined benefit plans-- like traditional pensions, they pay a benefit based on age and years of service and are funded by contributions actuarially computed to arrive at that benefit. The actuarial computations and reporting requirements make these relatively complicated and expensive for small enterprises.
  • Defined contribution plans – like 401(k) plans they fund accounts which pay out whatever their investment generates. They may be money purchase plans with fixed rates of contribution or profit sharing plans contributing a percentage of the business’s profit. Keogh profit sharing plans can also provide for employee contributions.

A separate return is filed for most Keogh plans with special rules for “one-participant” plans and those with less than $100,000 in plan assets. Each type of plan and its variations are subject to limits on contributions for owners and highly compensated employees and different limits for other employees, all fully described in J. K. LASSER’S YOUR INCOME TAX 2005.

For small business owners who find Keogh plans unwieldy, Congress has enacted alternatives in recent years. Your simplest solution may be a SEP-IRA or the appropriately named SIMPLE IRA. These plans create an individual retirement account that holds the assets for each participant. Permitted contributions are greater than for normal IRA’s but less than Keogh plans. The rules and procedures are simpler than for Keogh plans but still deserve your careful attention to the details described in J. K. LASSER’S YOUR INCOME TAX 2005.

Timing Tip: The deadline has passed to form an ’04 Keogh plan. Plans must be formed before year-end to make contributions for that year, but if you have already set up one, the actual contributions can be funded as late as the date of filing the tax return, including any extensions. SEP-IRA and SIMPLE-IRA plans can be formed and funded by the filing date.


For further information, to request a review copy of J. K. LASSER’S YOUR INCOME TAX 2005or to schedule an interview with J.K. Lasser spokesperson, tax attorney Donna LeValley, please contact:

Nancy Colson
Managing Director
The Alternative: Media Placement Specialists



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