Posted in Finance, Accounting and Economics Terms, Total Reads: 158
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