Keogh Plan

Last Updated :

21 Aug, 2024

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Table Of Contents

What is a Keogh Plan?

Keogh Plan is the type of retirement plan specially designed for self-employed persons, sole proprietors, professionals and unincorporated corporates like partnerships, Association of persons, etc. to give the retirement benefits to their employees by investing the funds of the plan in safe securities and by selecting the proper type of plan according to the need and requirements of business organization.

The Keogh plan distribution allows the higher contribution to get the maximum retirement benefits. The plan is different from an individual retirement arrangement plan in terms of rules, regulations, and contribution limits. It involves more legal requirements as compared to other plans as the annual filing is compulsory for this plan, which is done by an independent professional.

What is a Keogh Plan?

The Keogh Plan is a retirement plan created especially for independent contractors, business owners, professionals, and unincorporated corporations like partnerships, associations, etc.
They provide retirement benefits to their employees by investing the plan's funds in safe securities and by choosing the appropriate type of plan by the needs and requirements of business organizations.
The plan enables those who qualify to open an account under the Keogh Plan schemes, choose the kind of plan they want, and begin making pre-tax contributions to the project.

Keogh Plan Explained

Keogh Plan is the type of tax-advantageous retirement plan, unlike the other retirement plans. It is specifically for self-employed professionals, non-corporate businesses, etc. to give them retirement benefits. These are approved plans hence more reliable.

The Keogh plan eligibility and its rules were established in 1962 by Congress, is designed to give retirement benefits to professionals, self-employed persons, and unincorporated businesses. It is for those who want to contribute high to gain after retirement.

The plan is approved. But the popularity of the plan is less due to other similar types of plans like SEP – IRA, 401 (k) plans, etc. The employer can select the primary type of plan from a defined contribution plan or defined benefit plan. Each type has its benefits. The withdrawals from the plan are allowed after attaining the age of 59.5 but not after the 70.5. withdrawals before the defined age are subject to tax and 10 percent penalty.

History

Before understanding the keogh plan eligibility and other rules, it is important to understand the history in brief to be able to understand the concept in depth. Let us do so through the points below.

Eugene Keogh developed this plan by establishing the Self-Employed Individuals Tax Retirement Act in 1962. Still, with the changes in the economy, the Economic Growth and Tax Relief Reconciliation Act made changes in the plan in 2001. Now this plan is recognized by the name HR 10s or qualified plans in Internal Revenue Code.
It is specially designed for employees who want to contribute more for their retirement and benefits professionals like lawyers, valuers, doctors, who earn high and want to save more for their future cum retirement. The Internal Revenue Service has recognized this as a qualified plan and to give the tax benefits and retirement benefits to the self-employed.

Rules

The keogh plan distribution and eligibility criteria is an important aspect of the concept for anyone who wants to understand the concept in detail. For retirement plans and saving towards a stress-free retirement life, it is vital we understand the rules. Let us do so through the explanation below.

The plan allows the eligible persons to open the account under the Keogh Plan schemes, select the type of the plan, and start contributing pre-tax money to the plan. The plan gives the tax advantage as the contribution to the plan is not taxable, and you can withdraw after the age of 59.5 years. If withdrawals are made before the defined age, they are subject to a penalty. Still, an exception does not attract the penalty for withdrawing before the defined age.
The funds of the plan invest in the stock, mutual funds, bonds, safe securities, and other types of investments. The plan needs to be set before the end of the financial year in which deduction to be claimed. For claiming the deduction, the amount is to be contributed before the due date of filing a tax return. The money accumulated with investing gives benefits after retirement.
The plan also involves some legal requirements to comply with every year, and as the fund can invest in risk-based securities, the chances of loss are also there.

Types

Similar to most investment or savings plan, one size does not fit all. Depending on personal criteria and other factors, the type of keogh plan eligibility differs. Let us understand the types through the discussion below.

#1 - Defined Contribution Plan

In a defined contribution plan, you can contribute regularly up to a limit. There are two subtypes available in the defined contribution plan, which are as under:

Profit-Sharing Plan - In the Profit Sharing plan amount is to be contributed up to 25% of the profits of the business or $ 54000, whichever is lower. The amount of contribution may change every year in a profit-sharing plan.
Money Purchase Plan - In a money purchase plan, the percentage of profit to be set to contribute to the plan. The percentage is fixed, and; no changes are allowed, and if changes are made in a fixed percentage, it is subject to the penalty, and like a profit-sharing plan, the amount of contribution can change every year.

#2 - Defined Benefit Plans

Under defined benefit plans, the contributor can set the limit for the contribution to get the maximum benefit at the time or after the retirement. The contribution is subject to a higher threshold of $ 2,55,000. Both the plans allow pre-tax contributions and withdrawals are subject to the rules of the plan.

Benefits

Planning for a secure retirement plan must be on the priority list of every individual irrespective of their income sources; the Keogh plan eligibility helps in that very direction. Let us understand the benefits of the scheme through the discussion below.

They have approved plans hence gives more reliance and satisfaction to the contributor.
The contributions are flexible; one can set the limit of contribution for himself.
It is beneficial for professionals, and it also includes the non-incorporated businesses.
These are tax-advantageous plans and give the maximum retirement benefits.

Drawbacks

Despite being one of the most sought-after schemes in for sole proprietors and non-incorporated businesses, there are a few factors that turn out be hassles or hurdles. Let us understand the drawbacks of the Keogh plan distribution through the explanation below.

As the funds of the plan in risk-based securities, hence the chances of loss are more.
The cost involved in managing the plan is high as compared to other plans due to more legal requirements like annual filing.
Withdrawals before the defined age and change in the fixed percentage of contribution are subject to penalties.
Contributions are higher as compared to other plans; hence may not be suitable for all.

Keogh vs. IRA

Even though both Keogh plan distribution and IRA are schemes towards a secure retirement plan, there are differences in their fundamentals, eligibility criteria, and other such factors. Let us understand the differences through the comparison below.

Keogh’s plan is for sole proprietors and non-incorporated businesses. In contrast, the Individual Retirement Arrangement Plan is for self-employed and small owners with a minimum number of employees, and it does not include the non-incorporated businesses.
The contributor decides the contribution limit under the Keogh plan or contribution can be flexible as based on a percentage of profits, whereas, under the individual retirement arrangement plan, the contribution is fixed at $ 6000.
There is a provision for additional contribution if the age of a contributor who wants to establish an IRA is greater than 50 years. Also, under IRA, there is a double contribution provision if the contributor started contributing at the age near to retirement, but these provisions are not available under the Keogh Scheme.
In the Keogh plan, legal requirements like filing of annual returns are compulsory, whereas in an IRA, there are very minimum legal requirements and no provision of annual filing.

Frequently Asked Questions (FAQs)

What is a Keogh Plan, and who is eligible to participate?

A Keogh, an HR-10 plan, is a retirement savings plan for self-employed individuals and small business owners. To be eligible to participate in a Keogh Plan, you must have earned self-employment income from a business you operate as a sole proprietor, partnership, or as a member of a limited liability company (LLC). It is not available to employees of a corporation or other organizations.

How much can one contribute to a Keogh Plan?

The contribution limits for a Keogh Plan are determined by the type of Keogh Plan you have. There are two types: defined contribution plans and defined benefit plans. For defined contribution plans, such as profit-sharing or money purchase plans, the maximum contribution limit in 2023 is the lesser of $61,000 or 100% of your earned self-employment income.

Are there any tax advantages to a Keogh Plan?

Yes, there are tax advantages associated with a Keogh Plan. Contributions to a Keogh Plan are tax-deductible, meaning you can deduct them from your taxable income in the year you contribute. Hence, this reduces your overall tax liability. Additionally, the earnings on your Keogh Plan investments grow tax-deferred, meaning you will only pay taxes on the investment gains once you start making withdrawals in retirement.