Yes, Keogh plans are tax deductible. Contributions reduce your adjusted gross income for the year you make them, and investments inside the plan grow tax-deferred until you withdraw them. For 2026, a self-employed individual can deduct up to $72,000 in a defined contribution Keogh, and potentially well over $100,000 through a defined benefit version of the plan. The deduction is taken as an adjustment to income on your personal return, so you get the benefit even if you don’t itemize.
The rest comes down to which type of Keogh you use, how the owner’s contribution is calculated, where it goes on your tax forms, and the deadlines that decide whether the deduction is available at all.
How Much You Can Deduct in 2026
The ceiling depends on the plan’s structure. Most Keoghs are defined contribution plans. Defined benefit Keoghs allow much larger deductions for older business owners with high self-employment income.
Defined Contribution Keoghs
For 2026, the maximum deductible contribution to a defined contribution Keogh is the lesser of $72,000 or 25% of a participant’s compensation.1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs For W-2 employees, compensation is straightforward. For you as the business owner, it is not.
Your deductible contribution is based on “net adjusted self-employment income”: net profit reduced by the deductible half of self-employment tax and by the Keogh contribution itself. Because the contribution and the deduction depend on each other, the effective maximum rate for the owner works out to roughly 20% of net earnings rather than 25%.2Internal Revenue Service. Publication 560 – Retirement Plans for Small Business The IRS Rate Table and Deduction Worksheet in Publication 560 walks through the circular math.
An example. If your Schedule C shows $150,000 in net profit and you deduct roughly $10,600 for one-half of self-employment tax, your adjusted net earnings land around $139,400. Twenty percent of that is a maximum deductible contribution of about $27,880. The exact number shifts with your actual self-employment tax, but 20% is the practical ceiling for the owner.
The plan can only consider up to $360,000 of compensation per participant for 2026.1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs Earnings above that are ignored when figuring contributions.
Defined Benefit Keoghs
A defined benefit Keogh works like a private pension. Instead of capping what goes in each year, the plan caps what comes out in retirement. For 2026, the maximum annual benefit a participant can receive is $290,000.1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs The contribution needed to fund that benefit is set by an actuary based on your age, assumed returns, and years to retirement. For someone in their mid-50s or older with high self-employment income, the required contribution can be well over $100,000 a year.
The deduction is correspondingly large, but so is the commitment. Actuarial certification runs several thousand dollars a year, and you are locked into making the required contribution annually regardless of how the business performs.
Catch-Up Contributions
If your Keogh is structured to allow elective deferrals, participants aged 50 and older can contribute an additional $8,000 beyond the standard limits in 2026. Under the SECURE 2.0 Act, participants who turn 60, 61, 62, or 63 during the year get a larger catch-up of $11,250.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 These amounts sit on top of the $72,000 defined contribution ceiling, so a 62-year-old could shelter over $83,000 in a single year.
Who Can Take the Deduction
Keogh plans are open to anyone with self-employment income from a trade or business: sole proprietors, partners in a partnership, and independent contractors. The IRS historically called these HR-10 plans, though the agency now notes the “Keogh” label is seldom used because the tax code no longer distinguishes between corporate and non-corporate plan sponsors.4Internal Revenue Service. Retirement Plans for Self-Employed People Financial institutions and tax professionals still use the name freely.
The deduction is tied to earned income from the business itself. Wages from a separate W-2 job don’t count toward your Keogh contribution.
If your business has employees, you can’t limit the plan to yourself. Any common-law employee at least 21 years old with one year of service generally must be included, and you must contribute on their behalf at the same percentage rate you use for yourself.5Internal Revenue Service. Retirement Topics – Eligibility and Participation Skipping that step violates the nondiscrimination rules and can disqualify the entire plan, wiping out the deduction.
Where the Deduction Goes on Your Return
Your own Keogh contribution is deducted on Form 1040, Schedule 1, on the line for self-employed retirement plans. It is not a business expense on Schedule C. The IRS is explicit: if you mistakenly deduct your own contribution on Schedule C, you need to amend the return.6Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction The distinction matters because Schedule 1 adjustments reduce your adjusted gross income directly, which affects eligibility for other tax breaks that phase out at higher income levels.
Contributions you make on behalf of eligible employees are different. Those are a deductible business expense reported on Schedule C or the partnership return, and they reduce your self-employment tax base.
One point that catches people off guard: your own Keogh contribution does not reduce the income subject to self-employment tax. Schedule SE is calculated on net earnings before the retirement plan deduction. The contribution only lowers your income tax, not your Social Security and Medicare liability.
Deadlines That Decide Whether You Get the Deduction
A Keogh plan must be formally adopted by December 31 of the tax year you want the deduction for. This is stricter than the rules for a SEP IRA, which can be established as late as the tax return due date.4Internal Revenue Service. Retirement Plans for Self-Employed People If you’re reading this in March and haven’t signed a plan document yet, a Keogh deduction for the prior year is off the table.
Adopting the plan means signing a written plan document, typically a pre-approved prototype from a financial institution or a custom document drafted by a benefits attorney. The funding deadline is more forgiving. You can deposit the money anytime up to the due date of your tax return, including extensions. For most sole proprietors, that pushes the funding deadline as late as October 15 of the following year if you file an extension.
What Happens When the Money Comes Out
The deduction now is matched by ordinary income tax later. Every dollar you pull from a Keogh is taxed as ordinary income at your marginal rate for the year of the distribution. There’s no capital gains treatment, regardless of how the money was invested inside the plan.
Distributions before age 59½ are hit with an additional 10% early withdrawal tax on top of ordinary income tax.7Internal Revenue Service. Topic No. 558 – Additional Tax on Early Distributions From Retirement Plans Other Than IRAs The IRS lists exceptions, including distributions due to total and permanent disability, substantially equal periodic payments, and certain hardship situations.8Internal Revenue Service. 9Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners Your first RMD is due by April 1 of the year after you reach the applicable age; every subsequent one is due by December 31.10Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Missing an RMD triggers a 25% excise tax on the shortfall, dropping to 10% if you correct it within two years.11Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
Transactions That Can Cost You the Deduction
Because a Keogh is a qualified plan under ERISA, how plan assets are used is tightly restricted. Self-dealing is the biggest trap for sole proprietors. You cannot borrow from the plan (unless a formal loan provision exists and you follow its rules), use plan assets as collateral, sell property to the plan, or pay yourself unreasonable fees for managing the investments.12Internal Revenue Service. Retirement Topics – Prohibited Transactions
The penalties are severe. A prohibited transaction triggers a 15% excise tax on the amount involved for each year it remains uncorrected. If you don’t reverse it within the taxable period, the tax jumps to 100% of the amount involved.13Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions The rules reach the plan owner, family members, and any fiduciary or service provider connected to the plan. A disqualified plan loses its tax-favored status, and the deductions you took can be unwound.