Using turbotax, how do I enter catchup contributions to a Keogh plan?

[DawnC]

To get to that section, use the instructions in this link.   Answer YES when you get to the Keogh Plan question.    See Pub 560

If you're self-employed and setting up a Keogh for yourself as the sole participant, a fairly common choice is a defined contribution plan that includes both money-purchase and profit-sharing plans.   With these:

•  You can contribute up to 100% of your net earnings. However, you cannot deduct more than 25% of your net earnings.
•  You cannot contribute more than $66,000 (the 2023 limit).
•  You cannot base your calculations on more than $330,000 (the 2023 limit).

So how do you calculate the amount you can deduct to this plan for a tax year?

For purposes of example, we'll use 25%. Most people set these up so that they can get the maximum retirement deduction available.

The basic formula is your net profits (from Schedule C, Schedule F or K-1 (Partnership)) MINUS one-half your self-employment tax (line 27, Form 1040), if applicable, MINUS your Keogh contribution; all that TIMES your plan percentage.

It's not as tricky as it might sound. Here's an example of the simplified way of doing this:

Net Profits ($49,000, for example) MINUS
1/2 self-employment tax ($3,462) EQUALS
Adjusted Net Earnings ($45,538) 
TIMES 20% EQUALS
YOUR ALLOWABLE CONTRIBUTION: ($9,108)

You probably noticed that we multiplied by 20% instead of 25%.

That's sometimes referred to as an Equivalent Percentage. What it does is take into account that your Keogh deduction is reducing the income your deduction is based on and factors that in.    (These percentage references to the plans can drive you a little nuts. This is usually referred to as a 25% contribution. But since you're self-employed -- and your income gets reduced by the contribution -- it is really 25% of the income left after the contribution.)

Within that one defined contribution plan, you can have a money-purchase plan or a profit-sharing plan, or both.

Here are the rules on what you can deduct to those (and we're going to use the multiplier percentages -- i.e., the 20% max). (Note: the amount you can contribute under the IRS rules may be different than what you can deduct.) You can deduct:

•  Up to 20% to a money-purchase plan  (usually called a 25% money-purchase plan)
•  Up to 20% to a profit-sharing plan  (usually called a 25% profit-sharing plan)
•  But no more than the 20% or $66,000 total

You can break that up any way you like. You could just have a 20% money-purchase plan and still get the maximum deduction.   You could just have the 20% profit-sharing plan. Or you could have a combination of the two, which is what most people do.  What you need to remember is that there's still a maximum on the amount of earnings you can use to calculate your deduction: it's $330,000.   So, if you just use a profit-sharing plan instead of a combination plan, you'll be limited to $66,000, which is 20% of $330,000. With a combination plan, you'll be limited to $66,000.

The thing to remember is that with a money-purchase plan, you HAVE to contribute the percentage you designate. With a profit-sharing plan, you can optionally contribute from zero up to that designated percentage -- which gives you the most flexibility in any tax year. You select these percentages when you create the Keogh in the first place.