Definition
A Keogh Plan is a tax-deferred pension plan available to self-employed individuals and employees of unincorporated businesses. Named after New York Representative Eugene James Keogh, who championed its creation, the plan allows these individuals to add to their retirement savings while enjoying tax benefits. Established by the Self-Employment Individuals Retirement Act of 1962, not 1982, as suggested, Keogh plans can coexist with other retirement accounts such as corporate pensions or Individual Retirement Accounts (IRAs).
Examples
Example 1: Self-Employed Consultant
A self-employed marketing consultant decides to open a Keogh plan to save for retirement. By contributing a percentage of their annual income to the Keogh plan, they reduce their taxable income for that year and allow the savings to grow tax-deferred until retirement.
Example 2: Small Business Owner
A small business owner with no incorporated business structure utilizes a Keogh plan for themselves and their employees. Contributions made benefit from tax deferral, helping both the employer and the employees enhance their retirement savings without immediate tax implications.
Frequently Asked Questions (FAQs)
What is the main advantage of a Keogh plan?
The main advantage is tax-deferred growth. Contributions to a Keogh plan reduce taxable income for the year and allow savings to grow without immediate tax obligations until funds are withdrawn, typically in retirement.
Who is eligible for a Keogh plan?
Keogh plans are available to self-employed individuals, owners of small businesses, and employees of unincorporated businesses. This includes sole proprietors and partnerships.
Can you have a Keogh plan and an IRA at the same time?
Yes, individuals can have both a Keogh plan and an IRA simultaneously, allowing additional opportunities for tax-deferred retirement savings.
How much can you contribute to a Keogh plan?
Contribution limits depend on the type of Keogh plan. For defined-contribution plans, the limit is generally 25% of income, up to $58,000 (as of 2021), while defined-benefit plans have different calculations based on actuarial determinations.
What are the types of Keogh plans?
There are two main types: profit-sharing plans and defined-benefit plans. Profit-sharing plans are more flexible with contributions, while defined-benefit plans promise a set retirement benefit based on earnings history and years of service.
Related Terms
- Individual Retirement Account (IRA): A retirement savings account allowing individuals to contribute pre-tax or post-tax income, with tax deferral on growth until withdrawal.
- Simplified Employee Pension Plan (SEP): A retirement savings plan for small businesses and self-employed individuals, offering similar tax-deferred growth with simplified contributions.
- 401(k) Plan: A retirement savings plan sponsored by an employer, allowing employees to save and invest a portion of their paycheck before taxes are taken out.
- Defined-Contribution Plan: A retirement plan where the employer, employee, or both make contributions regularly, with benefits based on the account balance at retirement.
- Defined-Benefit Plan: A retirement plan that promises a specified monthly benefit upon retirement, based on salary and years of service.
References
- IRS - Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
- Investopedia - Keogh Plan
- U.S. Department of Labor - Retirement Plans, Benefits & Savings
Suggested Books for Further Studies
- “Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches” by Everett Allen and Joseph Melene
- “Tax-Free Retirement” by Patrick Kelly
- “The New Retirement Savings Time Bomb” by Ed Slott
Accounting Basics: “Keogh Plan” Fundamentals Quiz
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