Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Can an employee who contributes to a corporate pension plan also fund a Keogh plan?

1. Yes, but tax deductibility may be affected

2. No, it is not permitted

3. Yes, and tax deduction is guaranteed

4. Only for a limited amount

The correct answer is: Yes, but tax deductibility may be affected

An employee who participates in a corporate pension plan can indeed fund a Keogh plan, which is specifically designed for self-employed individuals or owners of unincorporated businesses. However, the aspect of tax deductibility is crucial here. While both plans allow for contributions, the total contributions made to both plans can affect the tax deductibility of the contributions to the Keogh plan. The Internal Revenue Service has established limits on how much can be contributed to defined contribution plans like Keogh plans. If the individual is already receiving contributions from their corporate pension plan, they might encounter limits on how much they can contribute to the Keogh plan and still deduct those contributions on their taxes. Therefore, while it is permissible to contribute to both plans, the tax implications should be carefully considered to avoid exceeding the maximum contribution limits and to understand how contributions to one may affect the other. This is why the first option is the most accurate reflection of the situation regarding contributions to a corporate pension plan alongside a Keogh plan.