Keogh
Encyclopedia
Keogh plans are a type of retirement plan for self-employed people
and small businesses in the United States.
Eugene James Keogh
of New York, they are sometimes called HR10 plans. IRS Publication 560 refers to them as “Qualified Plans.” They are different from Individual Retirement Account
s (IRAs).
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.
A person with a Keogh Plan can also contribute to an IRA (traditional or Roth
).
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.).
Businesses with more than 10 employees are not eligible for Keogh Plans.
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from this year’s tax, but taxes must be paid on the money when it is withdrawn during retirement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.) This is best illustrated by comparing the following 3 scenarios:
Scenario #1 – A self-employed accountant makes $50,000 per year from her accounting business. Her maximum contribution is 25% of her post-contribution income ($10,000, which would be the same as saying 20% of her gross income), regardless of whether she uses a SEP-IRA, Keogh Plan, or SIMPLE 401(k). Since there are less administrative costs, she would benefit most from choosing either the SEP-IRA or SIMPLE 401(k).
Scenario #2 - A family physician who owns his own practice makes $100,000 per year. His maximum contribution is 25% of his post-contribution income ($20,000, which would be the same as saying 20% of his gross income) whether he uses a Keogh Plan or a SEP-IRA. The cost of maintaining the SEP-IRA is much less, so he would benefit more from that plan.
Scenario #3 – An entrepreneur who owns a small marketing firm makes $400,000 per year. She wishes to contribute as much as possible to a retirement plan in order to minimize her current taxes. She could contribute up to $11,500 for a SIMPLE IRA, $49,000 to a SEP-IRA, or up to $65,500 in a Keogh Plan. By choosing the Keogh Plan over the SEP-IRA, she can contribute an additional $16,500 per year into her retirement plan. She can also contribute $5,000 into a traditional IRA. Based on a marginal tax rate of 33%, these contributions save her a total of $7,095 in taxes for the year.
Self-employment
Self-employment is working for one's self.Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade or business that they operate personally....
and small businesses in the United States.
History
Named for U.S. RepresentativeUnited States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Eugene James Keogh
Eugene James Keogh
Eugene James Keogh was a Democratic member of the United States House of Representatives from New York.-Life and Career:...
of New York, they are sometimes called HR10 plans. IRS Publication 560 refers to them as “Qualified Plans.” They are different from Individual Retirement Account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s (IRAs).
Format
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
Stocks
Stocks are devices used in the medieval and colonial American times as a form of physical punishment involving public humiliation. The stocks partially immobilized its victims and they were often exposed in a public place such as the site of a market to the scorn of those who passed by...
, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, mutual funds, etc.
Benefits
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
Roth IRA
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
).
Drawbacks
Keogh Plans are not as common as most other retirement plans because there are several limitations to Keogh Plans.Compared to other retirement plans (traditional IRA, SIMPLE IRA
SIMPLE IRA
A SIMPLE IRA, or "Savings Incentive Match Plan for Employees Individual Retirement Account", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for later use. Specifically, it is a type of Individual...
, 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.).
Businesses with more than 10 employees are not eligible for Keogh Plans.
All contributions must be made “pre-tax,” meaning that the contributions can be deducted
Tax deduction
Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...
from this year’s tax, but taxes must be paid on the money when it is withdrawn during retirement
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
. 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.) This is best illustrated by comparing the following 3 scenarios:
Scenario #1 – A self-employed accountant makes $50,000 per year from her accounting business. Her maximum contribution is 25% of her post-contribution income ($10,000, which would be the same as saying 20% of her gross income), regardless of whether she uses a SEP-IRA, Keogh Plan, or SIMPLE 401(k). Since there are less administrative costs, she would benefit most from choosing either the SEP-IRA or SIMPLE 401(k).
Scenario #2 - A family physician who owns his own practice makes $100,000 per year. His maximum contribution is 25% of his post-contribution income ($20,000, which would be the same as saying 20% of his gross income) whether he uses a Keogh Plan or a SEP-IRA. The cost of maintaining the SEP-IRA is much less, so he would benefit more from that plan.
Scenario #3 – An entrepreneur who owns a small marketing firm makes $400,000 per year. She wishes to contribute as much as possible to a retirement plan in order to minimize her current taxes. She could contribute up to $11,500 for a SIMPLE IRA, $49,000 to a SEP-IRA, or up to $65,500 in a Keogh Plan. By choosing the Keogh Plan over the SEP-IRA, she can contribute an additional $16,500 per year into her retirement plan. She can also contribute $5,000 into a traditional IRA. Based on a marginal tax rate of 33%, these contributions save her a total of $7,095 in taxes for the year.