Keogh Plan

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Definition: Keogh Plan

Also known as HR-10 plans, it is a tax deferred pension/retirement plan, that is employer funded. It is available to self employed workers/unincorporated businesses , sole partnership or proprietorship. These are qualified plans governed by the tax code. In short, a Keogh plan is similar to a 401(k) account for small businesses, but with high annual contribution limits. These retirement plans are tailored for the higher earning professionals and self employed individuals due to their business advantages.

A retirement account is one that allows employees to set aside a percentage of their earnings toward their retirement income. Keogh plans were created so that self-employed individuals or small companies’ employees have the chance to save for their retirement, offering retirement planning benefits on par with other plans.

A Keogh plan can be set up as

• A defined benefit(DB) plan – these are structured like a traditional pension plan which is self funded upto 100% of compensation. This kind of a retirement plan guarantees participants a set annual payment.

• A defined contribution(DC) plan – These are structured more like a 401(k)) account. Variants of this kind of defined contribution Keogh plan include profit-sharing, money purchase and combination plan options. DC plans are sometimes referred to as individual account plans. In a DC plan, a fixed contribution is made per pay period towards the account. High-income earners often use the money purchase kind of pension plans.

All contributions to Keogh Plans are pre-tax.

Features of Keogh Plans

• Contributions are generally tax deductible up to 25% of annual income.

• Keogh plans serve as tax shelters.

• Keogh plans invest in the same asset bases as 401(k) and IRAs.

• Similar to traditional retirement service accounts, money contributed to a Keogh can be invested tax-deferred up to retirement.

Advantages of Keogh Plans

• Self-employed workers have same benefit and tax advantages as with traditional, corporate pension and retirement plans.

• Contribution limits are higher

• Keoghs provide a source of financial security for non-traditional corporation workers.

• Keogh Plans are ideal for the self-employed, who generally have a higher tax obligations than other employees.

Disadvantages of Keogh Plans

• Complicated to set up with considerable paperwork required if. Plan maintenance involves administrative burden and steep upkeep costs.

• Keogh Plans cannot be used for individuals working in the capacity of an individual contractor

• The main benefit of a Keogh Plan, i.e high contribution limits is lost when individuals do not make a high level of income.

The main methods of funding a Keogh are through:

• a trust

• direct purchase of an annuity or other insurance products

• special custodial accounts

• purchase of U.S. government retirement bonds

Comparison of Keogh Plans and IRAs (individual retirement accounts)

• Contribution limits and individual versus employer contributions are the major differences

• Keogh contributions offer higher tax deductions for post tax contributions.

• While IRAs are restricted to individuals, Keogh Plans offer options for self employed individuals or small business owners


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