![Eugene J](https://upload.wikimedia.org/wikipedia/commons/b/b1/Eugene_J._Keogh.jpg)
Keogh plans are a type of retirement plan for
self-employed people and
small businesses
Small businesses are types of corporations, partnerships, or sole proprietorships which have fewer employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to ap ...
in the United States.
History
Named for
U.S. Representative
The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the lower chamber of the United States Congress, with the Senate being the upper chamber. Together they c ...
Eugene James Keogh of
New York
New York most commonly refers to:
* New York City, the most populous city in the United States, located in the state of New York
* New York (state), a state in the northeastern United States
New York may also refer to:
Film and television
* '' ...
, they are sometimes called HR10 plans. IRS Publication 560 refers to them as "Qualified Plans". They are different from
individual retirement account
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's ear ...
s (IRAs).
Format
There are two basic types of Keogh plan: defined-benefit, and defined-contribution.
In a defined-contribution plan, a fixed contribution (percentage of total paycheck or a fixed sum) is made per pay period. It may be set up as a profit-sharing plan, where the pension that one can withdraw after retirement depends on how much they invested in the plan while they worked.
The defined-benefits plan is more complex. It relies on an IRS formula to calculate the rate of contributions.
In either case, as in other retirement plans such as
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
s and IRAs, the funds in the plan can be invested in
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s,
bonds,
mutual funds
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
, etc.
Benefits
The main benefit of a Keogh plan versus other retirement plans is that a Keogh plan has higher contribution limits for some individuals. For 2011, employees can generally contribute up to $16,500 per year, and the employer can contribute up to $32,500, for a total annual contribution of $49,000. The total contribution cap is $50,000 for 2012, $51,000 for 2013, $52,000 for 2014, and up to 25% of compensation or $53,000 in 2016, whichever is lower.
A person with a Keogh plan can also contribute to an
IRA
Ira or IRA may refer to:
*Ira (name), a Hebrew, Sanskrit, Russian or Finnish language personal name
*Ira (surname), a rare Estonian and some other language family name
*Iran, UNDP code IRA
Law
*Indian Reorganization Act of 1934, US, on status of ...
(traditional or
Roth Roth may refer to:
Places
Germany
* Roth (district), in Bavaria, Germany
** Roth, Bavaria, capital of that district
** Roth (electoral district), a federal electoral district
* Rhineland-Palatinate, Germany:
** Roth an der Our, in the district B ...
).
Drawbacks
Keogh plans are not as common as most other
retirement plans
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
because there are several limitations to Keogh plans.
Compared to other retirement plans (traditional IRA,
SIMPLE IRA
A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money a ...
, etc.), Keogh plans require more administrative paperwork. While most small business owners can manage to set up other plans themselves, a Keogh plan requires complex calculations and professional help to establish. They've been largely replaced by SEP IRAs, which have the same contribution limits but much less paperwork.
Keogh plans cannot be established by an employee. Keogh plans are applicable to self-employed individuals who own their own unincorporated business (sole proprietorships, partnerships and LLCs).
All contributions must be made "pre-tax", meaning that the contributions can be
deducted from this year's tax, but taxes must be paid on the money when it is withdrawn during
retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
. There is no such thing as a "Roth Keogh plan".
Penalties may apply for making withdrawals from a Keogh plan before the account holder turns 59½.
The main benefit of a Keogh plan versus other plans (Keogh's high contribution limit) is lost in individuals who do not make a high level of income. These individuals may get the same benefits of a Keogh plan with less administrative cost by using another type of retirement plan (
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
,
SEP-IRA A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their ...
, etc.). This is best illustrated by comparing the following three scenarios:
Scenario #1 – A self-employed accountant makes $50,000 per year from her accounting business. Her maximum contribution is 25% of her post-contribution income ($10,000, which would be the same as saying 20% of her gross income), regardless of whether she uses a SEP-IRA, Keogh plan, or
SIMPLE 401(k)
A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money ...
. Since there are less administrative costs, she would benefit most from choosing either the SEP-IRA or SIMPLE 401(k).
Scenario #2 – A family physician who owns his own practice makes $100,000 per year. His maximum contribution is 25% of his post-contribution income ($20,000, which would be the same as saying 20% of his gross income) whether he uses a Keogh plan or a SEP-IRA. The cost of maintaining the SEP-IRA is much less, so he would benefit more from that plan.
Scenario #3 – An entrepreneur who owns a small marketing firm makes $400,000 per year. She wishes to contribute as much as possible to a retirement plan in order to minimize her current taxes. She could contribute up to $11,500 for a SIMPLE IRA, $49,000 to a SEP-IRA, or up to $50,000 (contribution cap for 2012) in a Keogh plan. By choosing the Keogh plan over the SEP-IRA, she can contribute an additional $1,000 per year into her retirement plan.
References
{{reflist
Retirement plans in the United States
Individual retirement accounts