Is a Keogh Plan Tax Deductible?
A Keogh plan is a retirement plan for self-employed people and small businesses. It works similar to the SEP and SIMPLE plans but requires more management. The money inside the Keogh grows tax-free and there's a penalty if you remove the funds before the age of 59-1/2, similar to all other qualified retirement plans.
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Tax Deductibility
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Money put in a KEOGH is deductible just as money put into an IRA. There are two places to list deductible contributions if you're an employer: one for the contributions on behalf of the employees and the other for contributions on your own behalf.
Employee Contributions for Unincorporated Businesses
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If you file a schedule C, you deduct the contributions to the Keogh plan on behalf of your employees, on line 19, pension and profit sharing plans. For partnerships filing Schedule 1065, you report the funds that went into the Keogh for the benefit of the employees on line 18. These are business expenses.
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Personal Keogh Contributions
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Proprietors do not deduct their contributions on Schedule C. Instead, you deduct them on line 28 of your 1040 form for the year 2010. The line is for reporting all "Self-employed SEP, SIMPLE, and qualified plans."
Voluntary Employee Contributions
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Some plans allow you to make voluntary employee contributions. These are not deductible but the interest grows tax-free. However, you pay taxes on the growth at withdrawal. Rather than contributing to the Keogh and attempting to separate the taxed from the untaxed funds, though, it's better to contribute to a Roth IRA. You never pay tax on the growth, pay penalties only on the growth when you withdraw funds early and don't have the hassle of separating pre-tax and post-tax funds at withdrawal.
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