What is a Keogh plan?
A Keogh plan is a retirement plan used by people who are self-employed, as well as by the partners to a partnership. The Keogh plan, much like a 401(k) plan for a standard employee, allows self-employed individuals to save for retirement while getting a present tax benefit by lowering their tax burden. A Keogh plan helps lower your tax burden because you are entitled to a tax deduction for a portion of your contributions to the plan.
If you have net earnings from a sole proprietorship, you can establish a Keogh plan for yourself. If you are a partner in a partnership, the plan must be set up by the partnership itself in order to qualify. In either case, the Keogh plan must be set up by the last day of the tax year in order for you to be entitled to deduct contributions to the plan for that tax year. The distinction here is that you could make payments following the close of the tax year but before the filing deadline, which would be deductible for that tax year (for example, you can open a plan in December of 2006, and payments made prior to April 17, 2007 can be deducted from your 2006 taxes, even though the contributions were not actually made in the 2007 tax year).
You should seek the advice of a tax consultant for help in calculating exactly how much of your Keogh plan contributions are deductible, as the calculation is rather complicated.