What is a Keogh Plan?
A Keogh plan is a powerful tool designed for self-employed individuals and small business owners to maximize their retirement savings. These plans can either be defined-benefit or defined-contribution plans, providing the flexibility to choose the best retirement strategy tailored to individual needs. Contributions to a Keogh plan are generally tax-deductible, empowering high-income earners to save more efficiently while reducing taxable income.
Key Takeaways
- A Keogh plan, also known as an HR10, refers to tax-deferred pension schemes tailor-made for self-employed individuals and unincorporated businesses.
- Although they come with higher administrative costs and upkeep than SEP IRAs or 401(k)s, Keogh plans offer higher contribution limits, making them an attractive option for high-income earners.
- Given the 2001 tax law amendments, the term “Keogh plan” is less commonly used, although its benefits remain highly relevant.
Understanding the Keogh Plan
Keogh plans cater specifically to self-employed individuals, offering the same types of qualified plans available to other small businesses. This includes defined-benefit plans and defined-contribution plans such as profit-sharing plans and money purchase plans. The IRS categorizes them as Keogh plans solely when they involve self-employed contributors.
A broad range of investment options such as stocks, bonds, certificates of deposit (CDs), and annuities are available under Keogh plans, similar to those found within 401(k)s and IRAs.
The concept stems from legislation spearheaded by U.S. Representative Eugene Keogh in 1962. Aimed at providing self-employed individuals with similar retirement planning benefits as those available to corporate employees, the resulting retirement vehicles became known as Keogh plans. Significant legislative changes in 2001 mean that today’s tax code no longer differentiates between corporate and self-employed plan sponsors, thus rendering the “Keogh” nomenclature increasingly rare.
Funds in a Keogh plan can be accessed at the age of 59½, with compulsory withdrawals beginning by age 73, aligning with other qualified retirement accounts.
Types of Keogh Plans
Qualified Defined-Contribution Plans
Self-employed individuals can opt for two types of defined-contribution Keogh plans: profit-sharing plans and money purchase plans.
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Profit-Sharing Plans: These plans allow contributions up to $66,000 as of 2023. Businesses are not obligated to generate profits to make contributions.
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Money Purchase Plans: Less flexible than profit-sharing plans, these require businesses to contribute a fixed percentage of annual income as defined in plan documents. The contribution cap for 2023 is set at 25% of annual income or $66,000, whichever is lower.
Qualified Defined-Benefit Plans
Defined-benefit Keogh plans stipulate the retirement benefits received based on salary and years of service. Contributions are calculated based on promised benefits, age, and expected returns on plan assets. For 2023, the maximum annual benefit is set at $265,000 or 100% of the employee’s compensation, whichever is lower.
Advantages and Disadvantages of Keogh Plans
Advantages
- Higher contribution limits make them particularly beneficial for high-income business owners.
Disadvantages
- They come with higher administrative and maintenance costs compared to SEP IRAs or 401(k)s.
Comparisons and FAQs
What Is the Difference Between a Keogh and IRA?
Keogh plans are specifically designed for the self-employed, offering much higher contribution limits compared to IRAs.
Who Is Eligible for a Keogh Plan?
Self-employed individuals, including sole proprietors, are eligible to set up a Keogh plan.
Is a Keogh the Same as a Solo 401(k)?
A Solo 401(k) is designed for sole proprietors or small businesses without employees. Unlike Keogh plans, it offers special contribution calculations but typically has lower contribution limits.
The Bottom Line
A Keogh plan is an excellent retirement vehicle for the self-employed or owners of unincorporated small businesses. Offering higher contribution limits and tax-deferred growth, Keogh plans empower individuals to invest in diverse financial instruments, including stocks and bonds, to secure their financial future.
Related Terms: SEP IRA, 401(k), Defined-Benefit Plan, Defined-Contribution Plan.
References
- Internal Revenue Service. “2023 Limitations Adjusted as Provided in Section 415(d), etc.”, Page 1.
- Internal Revenue Service. “Publication 560 | Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)”, Page 3.
- Congress.gov. “H.R.1836 - Economic Growth and Tax Relief Reconciliation Act of 2001”.
- Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs”.
