41.2 Choosing a Keogh Plan

You may set up a self-employed retirement plan called a Keogh plan if you have net earnings (gross business or professional income less allowable business deductions) from your sole proprietorship or partnership for which the plan is established. If you are an inactive owner, such as a limited partner, you do not qualify to set up a Keogh plan—unless you receive guaranteed payments for services that are treated as earnings from self-employment.

Set-up deadline.

To deduct contributions for a tax year, your Keogh plan must be adopted by the last day of that year (December 31 if you report on a calendar year basis). If it is, contributions can be made up to the due date of your return for that year, plus extensions.

Partnership plans.

An individual partner or partners, although self-employed, may not set up a Keogh plan. The plan must be established by the partnership. Partnership deductions for contributions to an individual partner’s account are reported on the partner’s Schedule K-1 (Form 1065) and deducted by the partner as an adjustment to income on Line 28 of Form 1040.

Including employees in your plan.

You must include in your plan all employees who have reached age 21 with at least one year of service. An employee may be required to complete two years of service before participating if your plan provides for full and immediate vesting after no more than two years. You generally are not required to cover seasonal or part-time employees who work less ...

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