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Author: michaeld63 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77233  
Subject: keogh investment Date: 5/14/2001 7:30 PM
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Hi, I could use some help with a Keogh plan I am about to open. I am opting to contribute 25% of self employment income into this plan. How do I calculate the correct amount of money to contribute? I initially assumed I would multiply .25 by the amount on my paycheck, but I was subsequently told by a tax lawyer that the amount would be somewhere in the neighborhood of 20%, as the 25% contribution rule is not that simple. Does anyone know how to calculate the correct contribution amount? This will be a money purchase pension with a 25% fixed contribution.

Thanks.

Mike
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29708 of 77233
Subject: Re: keogh investment Date: 5/15/2001 7:17 AM
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Greetings, Mike, and welcome. You asked:

Hi, I could use some help with a Keogh plan I am about to open. I am opting to contribute 25% of self employment income into this plan. How do I calculate the correct amount of money to contribute? I initially assumed I would multiply .25 by the amount on my paycheck, but I was subsequently told by a tax lawyer that the amount would be somewhere in the neighborhood of 20%, as the 25% contribution rule is not that simple. Does anyone know how to calculate the correct contribution amount? This will be a money purchase pension with a 25% fixed contribution.

The tax lawyer is correct. Your contribution will be about 20% of your net self-employed income. The calculation is described in IRS Publication 560 (Retirement Plans for Small Business) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. Pay particular attention to the discussion on deduction limits found on pages 12 and 18.

Regards..Pixy


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Author: mwyattea Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29709 of 77233
Subject: Re: keogh investment Date: 5/15/2001 9:14 AM
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To do the calculation, you need the following (this assumes you have no employees who are in the plan):

A> Net Schedule C Income (Line 31 I believe) after expenses (but NOT your Keough expense - your contribution amount goes on the first page of your 1040, not expense under Schedule C)

B> From your 1040, amount of the Self Employment Tax Deduction (which is calculated from Schedule SE).

Subtract SET Deduction from Schedule C Income. This amount is what you have available between "Net Earned Income" and your Keogh contribution.

In your case, you stated you have a 25% of Pay Money Purchase Plan (subject to a maximum of $30,000 contribution in calendar year 2000).

Let's assume you have $100,000 after SET deduction. Therefore, your Keogh contribution would be $20,000 (25% of $80,000 Net Earned Income). Algebra is Net Earned Income = $100,000 divided by 1.25. As a check, apply contribution formula to NEI; should add back to $100,000.

As an aside, back in 1983 when these rules first came out, I remember a bunch of folks complaining about the "inequity" between self-employed and salaried folks. The mistake was they were thinking that the self-employed person with $100,000 Schedule C could only get a $20,000 contribution while the salaried folk at $100,000 could get a $25,000 contribution. Of course, in the case of the self-employed, the $20,000 was coming out of their $100,000 while the salaried folk they were using in their argument was receiving $125,000 between salary and contribution. Fairer comparison is with the salaried person making $80,000 receiving a $20,000 contribution (neutral between sponsoring entities - which was the intent of TEFRA).





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Author: michaeld63 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29829 of 77233
Subject: Re: keogh investment Date: 5/22/2001 9:38 AM
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Thanks for the information!

May I run a hypothetical check by you to see if I understand this?
I looked into the SET and came up with 15% as the SET. According to the 25% money purchase plan, I have to multiply 1/2 the SET (.0765) by the amount on my paycheck. Then I multiply whatever is left by .20. The contributions are to be place quarterly into the account ( 4/15, 7/15, 10/15, and 1/15 of the next year).

Say I make $1,000.00 on one of my paychecks.

$1,000.00 x .0765 = $76.50

Therefore, I have $923.50 left x .2 = $184.70

I may contribute $187.50 of this paycheck into the Keogh money purchase pension plan. Correct?

Thanks!

Mike

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