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Retirement Plan FAQs Regarding Contributions - What is a partner’s “compensation” for retirement plan purposes?

What is a partner’s “compensation” for retirement plan purposes?

A partnership makes annual contributions to a partner’s retirement plan account based on her net earned income.

Net earned income

For a partner, this is calculated in the same way as for most other self-employed plan participants by starting with the partner’s earned income and then subtracting:

  • plan contributions for the partner, and
  • half of her self-employment tax.

Publication 560 has tables and worksheets to calculate the deduction for contributions to a qualified plan for a partner.

Partner’s earned income

A partner’s earned income is the income she receives for her services to materially help produce that income (see Internal Revenue Code sections 1402 and 401(c)(2).) A partner must separately calculate her earned income for each trade or business.

Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner’s income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners).

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