25% of $75,000
MAKING APRIL 15TH YOUR FAVORITE DAY
for 2002). The cap for the compensation that applies to SEP is 200,000 (indexed for 2002).
25% of $325,000
= $40,000 (Maximum Limit)
The term Keogh Plan refers to an employer-sponsored plan that covers a self-employed individual such as a partner in a partnership, an individual member of limited liability company, or a sole propri- etor. The plans are named after a congressman that first introduced legislation allowing self-employed individuals to sponsor these types of plans. For many years these plans were subject to more stringent rules and limits on contributions than plans sponsored by corpora- tions. Today, all types of business choose from among the same group of quilified plans. A sole proprietor, instead of establishing a Keogh Plan, establishes a profit-sharing plan, defined-benefit plan, or other plan from the array of tax-advantaged retirement plans. The only dis- tinction that still exists is the manner in which self-employed individ- uals detrmine their income for purpose of applying the limitations. The self-employed indviduals’ contributions or benefit is based on net earnings instead of salary. Note that net earnings can be deter- mined only after taking into account all qualified business deduc- tions, including the deduction for the retirement contribution. Therefore, the amount of net earnings and the amount of deduction are dependent on each other.
Profit-Sharing Plans The maximum employer contribution to the profit-sharing plan is the same as for an SEP, that is 25 percent of the compensation of all