Definition and Overview
A Keogh Plan, also known as an H.R. 10 Plan, is a tax-deferred pension plan designed for self-employed individuals and unincorporated businesses. Established under the Self-Employed Individuals Tax Retirement Act of 1962, it allows self-employed persons to set aside funds for retirement with the same tax advantages as corporate retirement plans.
Types of Keogh Plans
Keogh Plans come in two primary forms:
- Defined Benefit Plans: These plans promise a specified monthly benefit at retirement, which can be calculated based on factors such as salary history and duration of employment.
- Defined Contribution Plans: The contributions are defined, but the final benefit depends on the investment performance. Common types under this category include profit-sharing plans and money purchase plans.
Special Considerations
- Contribution Limits: For defined contribution Keogh Plans, contributions can be up to 25% of compensation, with an annual limit indexed by the IRS.
- Tax Treatment: Contributions to Keogh Plans are tax-deductible, while withdrawals are taxed as ordinary income.
- Compliance: Strict adherence to IRS regulations is required, including annual reporting (e.g., Form 5500).
Historical Context
The Keogh Plan was created by the Self-Employed Individuals Tax Retirement Act of 1962, sponsored by Congressman Eugene Keogh. This was integral in providing self-employed individuals similar retirement savings opportunities as those available to corporate employees.
Applicability and Benefits
Advantages for Self-Employed Individuals
- Tax Deferral: Contributions are tax-deferred, reducing current taxable income.
- Higher Contribution Limits: Compared to other retirement plans for individual businesses.
- Flexibility: Varieties in plan types allow adjustments based on business profitability and retirement needs.
Examples
- John the Consultant: John, a self-employed IT consultant, contributes up to 25% of his annual earnings into a Keogh Plan, optimizing his retirement savings while benefiting from immediate tax deductions.
Related Terms and Comparisons
401(k) Plan
A retirement savings plan sponsored by an employer where employees can contribute a portion of their wages either before or after taxes.
SIMPLE IRA
A Savings Incentive Match Plan for Employees Individual Retirement Account, designed for small businesses with 100 or fewer employees.
Simplified Employee Pension Plan (SEP)
A retirement plan that allows self-employed individuals and small business owners to make tax-deductible contributions towards their employees’ retirement and their own.
Frequently Asked Questions
What are the contribution limits for a Keogh Plan?
As of 2023, for defined contribution plans, contributions can be up to 25% of compensation, with a maximum limit of $66,000.
When can I start withdrawing from a Keogh Plan?
Withdrawals can typically be made without penalty after age 59½, although they are subject to income tax.
Is a Keogh Plan right for my business?
Keogh Plans are particularly advantageous for high-earning, self-employed individuals or small business owners who desire higher contribution limits and tax-deferral benefits.
References
- Internal Revenue Service (IRS). Keogh Plan Guidelines.
- Self-Employed Individuals Tax Retirement Act of 1962.
Summary
A Keogh Plan is an excellent retirement savings vehicle for self-employed individuals and unincorporated businesses, offering significant tax advantages and higher contribution limits. By understanding the types, benefits, and regulatory requirements, individuals can effectively plan for a secure retirement.
