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Keogh plans can only be used by self-employed individuals and unincorporated businesses.
There are many different types of retirement plans for self-employed individuals. A Keogh plan is one of them.
A Keogh (pronounced KEE-oh) plan was once a very popular retirement savings tool for sole proprietors and those who work for unincorporated businesses. However, in 2001, the Economic Growth and Tax Relief Reconciliation Act ushered in big changes to this tax-advantaged retirement plan.
While Keogh plans still exist today, they’re mainly used by highly compensated individuals because they offer high contribution limits. Unfortunately, the administrative burden of operating them can be substantial.
A Keogh plan is a type of retirement plan for self-employed individuals and those who work for unincorporated businesses. Contributions to Keogh plans can be made with pre-tax dollars, subject to annual contribution limits.
Keogh plans can be structured as defined benefit plans that guarantee a certain income in retirement. However, most are defined contribution plans -- they don’t provide an income guarantee, but rather allow workers to contribute a set portion of their salaries. The most common types of Keogh plans include:
Keogh plans were named after Eugene James Keogh, a New York congressman. The congressman was instrumental in the passage of the Self-Employed Individuals Tax Retirement Act of 1962, a law allowing unincorporated businesses to sponsor retirement plans for workers. However, the IRS has indicated this term is outdated, with Keogh plans now referred to as qualified retirement plans or HR 10s.
The rules for a Keogh plan are similar to those applicable to many other retirement plans for the self-employed:
However, Keogh plans can only be used by self-employed individuals and unincorporated businesses. When you start a Keogh plan, you’re obligated to adopt a written plan in accordance with the requirements of IRS Publication 560, although many financial institutions such as banks and brokerage firms can provide you with prototype plans the IRS has approved.
You’re also required to file IRS Form 5500 annually.
Although there are similarities, there are also important differences between Keogh plans and other retirement plans for the self-employed:
Keogh plans provide flexibility in how they are structured, with a choice of a defined benefit plan or one of several types of defined contribution plans including a profit-sharing plan or money purchase plan. They also enable higher tax-deductible contributions, so highly compensated individuals may prefer them to other alternatives.
However, the major downside of a Keogh plan is the substantial administrative burden, including the requirement to file an annual Form 5500 with the IRS, and the costs of establishing and maintaining a plan can be higher. Before determining a Keogh plan is right for you, you should consider a SEP-IRA, SIMPLE IRA, Solo 401(k) or traditional or Roth IRA.
