Does a Keogh Plan Need a Separate TIN?
A Keogh is a pension plan for small businesses, such a self-employed individual or unincorporated business. It's flexible in design and allows the employer to make the Keogh plan a defined benefit, defined contribution or profit-sharing plan. If you’re a business owner, you may already have a tax identification number for the business called an Employer Identification Number if you have employees. However, if you don't, you'll need one to start a Keogh plan.
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Establishing the Keogh
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You must establish your Keogh by December 31 of the year you plan to contribute. However, you can contribute until you submit your tax return. You'll need to select the type of plan that is best for your situation from the three types of Keoghs: defined contribution, defined benefit and profit sharing. Most investment companies and banks offer prototypes of plans approved by the IRS, which are less expensive than one personally designed for your business. If you're considering a Keogh, secure an employer identification number (EIN) for your business.
Plan Limits
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If you have a defined benefit plan, the benefit for your employees or yourself can't be more than 100 percent of the average of the highest three consecutive years or the person's average compensation while employed in the business. If $195,000 is smaller, then that's the maximum benefit. You may need professional help to calculate the actual contribution amount. At the time of publication the defined contribution plan limits your contribution to the lesser of 100 percent of compensation or $49,000. There are also deduction limits for the plans. For profit-sharing plans and defined benefit plans such as money purchase plans, you can't exceed 25 percent of the compensation you paid during the year. If you're self-employed, there are additional rules.
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Special Rules for Self-Employed Keogh Contributions
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You'll need to use special tables to calculate the amount you can contribute if you are self-employed. These are in chapter 5 of IRS Publication 560. Use either the Rate Worksheet for Self-Employed or the Rate Table for Self-Employed. You have to take into consideration your self-employment tax and your contribution to the Keogh. Both of these reduce the amount of your profit, and therefore your income.
Securing an EIN
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If you don't have an employer identification number, you'll need one. You'll use it as the plan's identification number for tax purposes. If you already have one, there's no need to apply for another. It takes a little time to receive the number if you use form SS-4 and process the application by mail, but there are faster methods. You can get an EIN by fax or phone but the quickest method is to use the online application at the IRS website. You'll receive a number upon completion that you can use immediately.
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References
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