Keogh Retirement Plan Basics: A Retirement Plan for the Self-Employed

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What is a Keogh Plan?

A Keogh retirement plan is a tax deferred retirement savings program for the self-employed. It acts much like an IRA, the main difference being contribution limits. The contribution limit for a Keogh retirement plan depends on the type of Keogh. Keough profit-sharing plan contributions are based on a percentage of self-employment income and is capped at $49,000 annually. Setting up a Keogh is significantly more difficult than establishing an IRA or a SEP IRA. Most brokers, however, should be able to assist you with the paperwork.

Keogh Retirement Plan Types

There are two types of Keogh plans available: profit-sharing plans and defined benefit plans. A Keogh defined benefit plan is set up to receive a specific benefit at retirement. The contribution must be figured by an actuary. The exact amount depends on your desired benefit, income, anticipated investment returns, and years until retirement. Administrative costs run a couple thousand dollars a year and once the defined benefit plan is established, the employer must contribute to it each year.

Defined benefit Keogh plans and its associated costs may be beneficial if you earn a lot of money and are approaching retirement; otherwise, an IRA, SEP, Solo 401 (k), or profit sharing Keogh makes more sense.

What is a Keogh Plan: Eligibility Rules

Choosing a retirement plan is one of the most important business decisions you’ll ever make. The following rules apply to Keogh profit-sharing plans:

  • Keogh plans are a special type of retirement plan designed for sole proprietors, partners, and their employees.
  • If you own a business or if you are a partner of a business that is not incorporated, you can open a Keogh. You must also perform personal services for the company.
  • If you own more than one unincorporated business, you must open a Keogh for each business.
  • Full-time employees must be included in a Keogh plan if they have worked for the company full time for more than three years.
  • If you have a regular job and earn self-employment income, you can still save through a Keogh plan. You must receive self-employment income, however, to be eligible.
  • A plan document must be drafted in year one.
  • You must file an annual report with the IRS. This can be done by yourself in most cases.

What is a Keogh Plan: Contribution and Distribution Rules

  • The plan must be set up before the end of the year if you wish to make contributions for that year. Contributions, however, can be counted for the previous year up until the tax-filing deadline.
  • Annual contributions are limited to 20% of self employment income up to a maximum of $46,000 in 2008 and $49,000 in 2009.
  • Keogh contributions are tax deductible and savings accrue tax deferred.
  • Keough distributions are taxed upon withdrawal at the owner’s tax rate at time of withdrawal.
  • Withdrawals made before 59.5 years old are subject to an additional 10% penalty.