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.
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: