Keogh plans are a type of retirement plan for self-employed and small business owner. 

 

Plan Type:

There are 2 basic types of Keogh Plans: defined-benefit, and defined-contribution.

In a defined-contribution plan, a fixed contribution (percentage of total paycheck or a fixed sum) is made per pay period.

The defined-benefits plan is more complex. It relies on an IRS formula to calculate the rate of contributions. It may be set up as a profit-sharing plan, where the pension that one can withdraw after retirement depends on how much they invest in the plan while they worked.

In either case, as in other retirement plans, the funds in the plan can be invested in stocks, bonds, mutual funds, etc

Benefit:

The main benefit of a Keogh Plan vs. other retirement plans is that a Keogh Plan has higher contribution limits for some individuals. Employees can generally contribute up to $16,500 per year, and the employer can contribute up to $32,500, for a total annual contribution of $49,000 (www.irs.gov/pub/irs-pdf/p560.pdf).

A person with a Keogh Plan can also contribute to an IRA (traditional or Roth).

Keogh Plans limitations :

Compared to other retirement plans (traditional IRA, SIMPLE IRA, etc.), Keogh Plans require more administrative paperwork. While most small business owners can manage to set up other plans themselves, a Keogh Plans requires complex calculations and professional help to establish.

Keogh Plans cannot be used for “self-employed” individuals who work in the capacity of an independent contractor. Keogh Plans are applicable to self-employed individuals who own their own business (with articles of incorporation, etc.).

All contributions must be made “pre-tax,” meaning that the contributions can be deducted from this year’s tax, but taxes must be paid on the money when it is withdrawn during retirement. There is no such thing as a “Roth Keogh Plan.”

Penalties may apply for making withdrawals from a Keogh Plan before you turn 59½.

The main benefit of a Keogh Plan vs. other plans (Keogh’s high contribution limit) is lost in individuals who do not make a high level of income. These individuals may get the same benefits of a Keogh Plan with less administrative cost by using another type of retirement plan (401k, SEP-IRA, etc.)