Keogh Plan

Definition

Keogh plans are a type of retirement plan for self-employed people and small businesses in the United States.

Keogh Plan

What is the ‘Keogh Plan’

A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined as contributions. Contributions are generally tax deductible up to a certain percentage of annual income with applicable absolute limits in U.S. dollar terms, which can be changed from year to year by the U.S. Internal Revenue Service (IRS).

Explaining ‘Keogh Plan’

Keogh plans represent retirement plans for self-employed people and unincorporated businesses, such as sole proprietorship and partnerships. If an individual is an independent contractor, he cannot set up and use a Keogh plan for retirement.

Qualified Defined-Contribution Plans

Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made on a regular basis up to a limit. Profit-sharing plans are one of the two types of Keogh plans that allow a business to contribute up to 25% of compensation or $53,000 in 2016. A business does not have to generate profits to set aside money for this type of plan.

Qualified Defined-Benefit Plans

Qualified defined-benefit plans state the annual benefits to be received at retirement, and these benefits are typically based on salary and years of employment. Contributions towards defined-benefit Keogh plans are based on stated benefits and other factors, such as age and expected returns on plan assets. The IRS stated that in 2016, the maximum annual benefit is set at $210,000 or 100% of the employee’s compensation, whichever is lower.

Advantages and Disadvantages of Keogh Plans

Keogh plans were established through legislation by Congress in 1962 and were spearheaded by Rep. Eugene Keogh. As with other qualified retirement accounts, funds can be accessed as early as age 59.5, and withdrawals must begin by age 70.5.

Keogh Plan FAQ

How much can you put in a Keogh plan?

Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made regularly up to a limit. Profit-sharing plans allow a business to contribute up to 100% of compensation, or $58,000 as of 2021, according to the IRS.

Who is subject to Keogh plan rules?

Any small business owner establishing a Keogh plan for themselves must replicate for any employee that meets the hourly requirements (all employees who have worked for the business for at least two years with a minimum of 1,000 hours a year).

When can you withdraw from a Keogh plan?

At age 59½, you may begin to make penalty-free withdrawals and only pay income taxes on the amount you withdraw, similar to a traditional IRA. Withdrawing money before age 59½ might make you pay a 10% penalty fee in addition to income taxes on the amount of your withdrawal.

Are contributions to Keogh plan deductible?

Contributions to Keoghs are made pretax, reducing the taxable income of the contributor. Self-employed individuals can deduct the entire yearly Keogh contribution amount, including contributions made on employees’ behalf.

Who Cannot participate in a Keogh plan?

Only a sole proprietorship, a partnership, a limited liability company or a corporation can establish a Keogh plan. An independent contractor/freelance worker cannot set up a Keogh plan, nor can one member of a partnership do so independently.

How is Keogh contribution calculated?

If net business profit multiplied by 0.9235 is $106,800 or less, then the deduction equals 0.5 x (net profit x 0.9235) x 0.153. This yields $7,065. If the net business profit exceeds $106,800, then the deduction equals 0.5 x ((net profit x 0.9235) x 0.029 + $13,243.20).

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Definition

Keogh Plan

What is the ‘Keogh Plan’

Explaining ‘Keogh Plan’

Qualified Defined-Contribution Plans

Qualified Defined-Benefit Plans

Advantages and Disadvantages of Keogh Plans

Keogh Plan FAQ

How much can you put in a Keogh plan?

Who is subject to Keogh plan rules?

When can you withdraw from a Keogh plan?

Are contributions to Keogh plan deductible?

Who Cannot participate in a Keogh plan?

How is Keogh contribution calculated?

Further Reading

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