Keogh Plan Definition

Summary:

“Keogh Plan” refers to tax-deferred pension plans designed for self-employed individuals. These encompass both defined-benefit and defined-contribution plans, with the latter being more prevalent. Contributions are usually tax-deductible up to a certain percentage of annual income, subject to varying absolute limits that the IRS can modify each year.

Understanding the Keogh plan

“Keogh Plan” denotes retirement plans tailored for self-employed individuals, covering both defined-contribution and defined-benefit options. If a self-employed individual is involved, these plans are termed Keogh plans.

Keogh plans offer investment avenues akin to those in 401(k)s and IRAs, including stocks, bonds, CDs, and annuities.

The name originates from U.S. Representative Eugene Keogh, a key figure in passing the Self-Employed Individuals Tax Retirement Act of 1962. Plans intended for the self-employed became known as Keogh plans. The distinction between corporate and other retirement plans was later removed by the Economic Growth and Tax Relief Reconciliation Act of 2001.

Like other qualified retirement accounts, withdrawals from a Keogh plan can commence at age 59½, with mandatory withdrawals starting at age 73.

Types of Keogh plans

Qualified defined-contribution plans

Keogh plans can be structured as qualified defined-contribution plans, involving regular contributions up to specific limits. Profit-sharing plans fall under this category, allowing businesses to contribute up to $66,000 as of 2023. Profit generation is not mandatory to allocate funds for this plan.

Money purchase plans are less flexible but necessitate a fixed percentage of annual income to be contributed annually, as specified in plan documents. Modifying this percentage may result in penalties. The contribution limit for 2023 is 25% of annual compensation or $66,000, whichever is lower.

Understanding qualified defined-benefit plans

Qualified defined-benefit plans play a pivotal role in offering retirement security for individuals. These plans outline the retirement benefits an individual will receive, primarily determined by their salary and the length of their employment. What sets these plans apart is their commitment to delivering a predetermined pension amount upon retirement, ensuring a reliable income stream during the post-career phase.
Contributions to defined-benefit plans are strategically based on these specified benefits and various factors, such as the employee’s age and the anticipated returns on investment assets. This methodical approach is aimed at creating a sustainable pension fund that aligns with an employee’s earnings trajectory and career span.

For the year 2023, there is a cap on the maximum annual benefit that an individual can receive from a qualified defined-benefit plan. This cap is set at either $265,000 or 100% of the employee’s compensation, depending on which value is lower. This ceiling ensures that the benefits remain reasonable and in line with the individual’s earnings history.

Exploring advantages and disadvantages of Keogh plans

WEIGH THE RISKS AND BENEFITS

Here is a comprehensive list of the potential advantages and drawbacks to carefully evaluate:

Pros
  • Ample Contribution Limits: Keogh plans offer higher contribution limits in comparison to SEP or 401(k) plans, providing an excellent avenue for substantial retirement savings.
Cons
  • Enhanced Administrative Responsibilities: Managing a Keogh plan can involve more administrative complexities and upkeep costs, necessitating careful attention and potentially incurring additional expenses.

Comparing Keogh plans with IRAs

Keogh plans cater specifically to the self-employed demographic, positioning themselves as a retirement solution with considerably elevated contribution limits when contrasted with traditional Individual Retirement Accounts (IRAs). This advantage makes Keogh plans an attractive choice for self-employed individuals aiming to maximize their retirement savings potential.

Eligibility criteria for a Keogh plan

Keogh plans are meticulously designed to serve the unique needs of the self-employed workforce, including sole proprietors. If you operate as a sole proprietor or are engaged in self-employment, you are eligible to enroll in a Keogh plan, taking advantage of its tailored benefits to secure your financial future.

Keogh plans vs. solo 401(k)s: a comparison

A solo 401(k), also known as a one-participant 401(k), mirrors a conventional 401(k) but incorporates special calculations catering to sole proprietors or small businesses devoid of employees. In contrast, Keogh plans shine with notably higher contribution limits compared to solo 401(k)s. This distinction underscores the advantages offered by Keogh plans for those seeking robust retirement savings avenues.

Frequently asked questions

Can Keogh plans be used by incorporated businesses?

No, Keogh plans are designed specifically for self-employed individuals. Incorporated businesses have other retirement plan options available to them.

Are Keogh plans only for high-income business owners?

While Keogh plans do offer higher contribution limits that appeal to high-income business owners, they can be utilized by any eligible self-employed individual.

Can I contribute to both a Keogh plan and an IRA?

Yes, you can contribute to both a Keogh plan and an IRA, provided you meet the eligibility criteria for each and stay within the contribution limits.

Key takeaways

  • “Keogh Plan” encompasses tax-deferred retirement options for self-employed individuals, comprising defined-benefit and defined-contribution plans.
  • Contribution limits for Keogh plans are higher than those of SEP or 401(k) plans, appealing to high-income business owners.
  • Keogh plans have evolved from being exclusively for the self-employed due to changes in tax retirement laws.
  • Distinct types of Keogh plans include qualified defined-contribution plans (profit-sharing and money purchase) and qualified defined-benefit plans.
  • Keogh plans offer diverse investment opportunities, paralleling other retirement accounts.
View Article Sources
  1. Keogh plan – Cornell Law School
  2. The new Keogh plan – PubMed
  3. Business Plan: What It Is, What’s Included, and How To Write One – SuperMoney
  4. How to Plan for Your Financial Future – SuperMoney