What Is a Keogh Plan?
If you're self-employed, you might have heard of a Keogh plan—it's essentially a tax-deferred retirement savings plan similar to a 401(k), but tailored for people like you who work for themselves. I want to make this clear: the term 'Keogh plan' refers to qualified plans that cover self-employed individuals, which can be either defined-benefit or defined-contribution plans, though most are set up as the latter. Your contributions are generally tax-deductible up to a certain percentage of your annual income, with absolute dollar limits that the IRS adjusts yearly.
Key Takeaways
Let me break this down directly: a Keogh plan is a tax-deferred pension plan, whether defined-benefit or defined-contribution, specifically for self-employed people. These plans come with more administrative burdens and higher upkeep costs than options like Simplified Employee Pension (SEP) or 401(k) plans, but they offer higher contribution limits, which is why many high-income business owners choose them. Keep in mind, though, that current tax laws no longer distinguish between incorporated and self-employed plan sponsors, so the term 'Keogh plan' isn't used as often anymore.
Understanding Keogh Plans
You should know that Keogh plans are the same qualified plans that other small businesses use, such as defined-contribution plans including profit-sharing and money purchase plans, or defined-benefit plans. The IRS specifically calls them Keogh plans when they cover self-employed individuals. These plans can invest in the same securities as 401(k)s and IRAs, like stocks, bonds, certificates of deposit (CDs), and annuities. The name comes from U.S. Representative Eugene Keogh, who helped pass the Self-Employed Individuals Tax Retirement Act of 1962 to give self-employed people access to retirement plans. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 eliminated the distinction between corporate and other sponsors.
Fast Fact
Here's a quick note: just like other qualified retirement accounts, you can access funds in a Keogh plan as early as age 59½, and you must start withdrawals by age 73 or 75, depending on your birth year.
Types of Keogh Plans
Keogh plans come in a couple of main types, and I'll explain them straightforwardly. First, there are qualified defined-contribution plans, where you make regular contributions up to a limit. Profit-sharing plans are one type, allowing a business to contribute up to $69,000 in 2024 (that was $66,000 in 2023), and you don't even need profits to contribute. Money purchase plans are less flexible; they require contributing a fixed percentage of income each year as specified in the plan documents, and changing that percentage could lead to penalties. For 2024, the limit is 25% of annual compensation or $69,000, whichever is lower (it was $66,000 or 25% in 2023). Then there are qualified defined-benefit plans, which specify the annual benefits you'll receive at retirement, based on factors like salary and years of employment. Contributions depend on those stated benefits, age, and expected returns. The maximum annual benefit for 2024 is $275,000 or 100% of compensation, whichever is lower (it was $265,000 in 2023).
Pros and Cons of Keogh Plans
Be aware that Keogh plans carry more administrative burdens and higher upkeep costs than SEP IRAs or 401(k) plans. On the positive side, their higher contribution limits make them a solid choice for high-income business owners like you might be.
What Is the Difference Between a Keogh and an IRA?
If you're comparing, Keogh plans are built for self-employed people, and while you can contribute to an IRA as a self-employed individual, Keogh plans allow much higher contribution limits.
Who Is Eligible for a Keogh Plan?
Eligibility is straightforward: Keogh plans are for self-employed people, so if you're a sole proprietor, freelancer, or otherwise work for yourself, you can enroll in one.
Is a Keogh the Same As a Solo 401(k)?
No, they're not the same—a solo 401(k), or one-participant 401(k), is basically a regular 401(k) adjusted for sole proprietors or small businesses without employees. A Keogh plan, however, has much higher contribution limits than a solo 401(k).
The Bottom Line
In summary, a Keogh plan is a retirement option for self-employed individuals or unincorporated small businesses, typically set up as defined-contribution or defined-benefit plans. They can invest in the same things as other retirement plans, including stocks, bonds, CDs, and annuities.
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