Self-Employment Retirement Plan

Self-Employment Retirement Plan Keogh Plan Tax-Deferred Pension Retirement Savings Self-Employed Unincorporated Business
A Self-Employment Retirement Plan, also referred to as a Keogh Plan, is a tax-deferred pension account specifically designed for self-employed individuals and unincorporated businesses. It enables them to set aside a portion of their income for retirement.
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Self-Employment Retirement Plan (Keogh Plan)

Definition

A Self-Employment Retirement Plan, commonly known as a Keogh Plan, is a tax-deferred retirement plan for self-employed individuals or those who own small businesses that are unincorporated. These plans allow eligible participants to contribute a portion of their income toward their retirement savings, offering significant tax benefits.

Examples

  1. Defined-Contribution Keogh Plan: Allows self-employed individuals to make annual contributions up to a set limit. Employers can contribute on behalf of their employees and themselves.
  2. Defined-Benefit Keogh Plan: Establishes a pension based on the individual’s earnings and years of service. Contributions are typically determined by actuarial calculations.

Frequently Asked Questions

Q: Who is eligible to establish a Keogh Plan?
A: Self-employed individuals, partners in a business partnership, and small business owners with unincorporated businesses are eligible.

Q: What are the tax benefits of a Self-Employment Retirement Plan?
A: Contributions to the plan are tax-deductible, reducing taxable income. Investment gains within the plan grow tax-deferred until withdrawn.

Q: Are there contribution limits for Keogh Plans?
A: Yes, the contribution limits are set annually by the IRS and may vary based on whether the plan is a defined-contribution or a defined-benefit plan.

Q: When can participants start withdrawing funds from a Keogh Plan?
A: Participants can begin withdrawing funds without penalty at age 59½, and required minimum distributions must start by age 72.

Defined-Contribution Plan: A retirement plan where contributions are defined, but the future benefits may vary based on investment returns.

Defined-Benefit Plan: A retirement plan where the benefits are predetermined based on factors such as salary history and duration of employment.

Tax-Deferred: Investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor takes possession of them.

SEP IRA (Simplified Employee Pension Individual Retirement Account): A retirement plan that provides benefits similar to a Keogh Plan but is easier to set up and administrate.

Online Resources

  1. IRS: Retirement Plans for Self-Employed People
  2. U.S. Department of Labor: Types of Retirement Plans
  3. Investopedia: Keogh Plan

Suggested Books for Further Studies

  1. “Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches” by Patti S. Spencer - Offers an in-depth look at various retirement plans including Keogh Plans.

  2. “The Bogleheads’ Guide to Retirement Planning” by Taylor Larimore et al. - Provides strategies and advice for effective retirement planning.

  3. “The Simple Path to Wealth” by JL Collins - Discusses investment strategies and retirement plans for independent individuals.

Fundamentals of Self-Employment Retirement Plan: Personal Finance Basics Quiz

### What is another term commonly used for a Self-Employment Retirement Plan? - [ ] IRA - [x] Keogh Plan - [ ] 401(k) - [ ] Roth IRA > **Explanation:** A Self-Employment Retirement Plan is also known as a Keogh Plan, designed specifically for self-employed individuals and unincorporated businesses. ### Who is eligible to establish a Keogh Plan? - [ ] Only large corporations - [x] Self-employed individuals and small business owners with unincorporated businesses - [ ] Government employees - [ ] Students > **Explanation:** Keogh Plans are intended for self-employed individuals, partners in a business partnership, and small business owners with unincorporated businesses. ### Can contributions to a Keogh Plan be tax-deductible? - [x] Yes, contributions are tax-deductible - [ ] No, contributions are not tax-deductible - [ ] Only partially deductible - [ ] Tax-deductibility depends on the plan's performance > **Explanation:** Contributions to a Keogh Plan are tax-deductible, which reduces taxable income. ### At what age can participants begin withdrawing funds without penalty from a Keogh Plan? - [ ] 50 - [ ] 55 - [x] 59½ - [ ] 70 > **Explanation:** Participants can start withdrawing funds without penalty at age 59½. ### What must start by age 72 for participants in a Keogh Plan? - [x] Required Minimum Distributions (RMDs) - [ ] Social Security benefits - [ ] Voluntary retirement contributions - [ ] Medicare enrollment > **Explanation:** Required Minimum Distributions (RMDs) must begin by age 72 for participants in a Keogh Plan. ### Which type of Keogh Plan establishes a pension based on earnings and years of service? - [ ] Defined-Contribution Plan - [x] Defined-Benefit Plan - [ ] SEP IRA - [ ] Roth 401(k) > **Explanation:** A Defined-Benefit Keogh Plan establishes a pension based on the individual's earnings and years of service. ### Can employees of a small business contribute to a Keogh Plan? - [x] Yes, if the employer sets up the contributions - [ ] No, only the self-employed individual contributes - [ ] Only if the employees are part of a union - [ ] Employees cannot contribute to a Keogh Plan > **Explanation:** Employees can contribute to a Keogh Plan if the employer sets up and makes contributions on behalf of employees and themselves. ### What does "tax-deferred" mean in the context of a Keogh Plan? - [ ] Contributions are not taxed ever - [ ] Taxes are only paid if contributions exceed limits - [x] Investment earnings grow tax-free until withdrawal - [ ] Contributions are taxed twice > **Explanation:** "Tax-deferred" means that investment earnings grow tax-free within the plan until they are withdrawn. ### Which of the following is an alternative to a Keogh Plan for self-employed individuals? - [x] SEP IRA - [ ] 401(k) - [ ] HSA - [ ] 403(b) > **Explanation:** A SEP IRA is a suitable alternative to a Keogh Plan for self-employed individuals and offers similar tax benefits. ### What is the primary purpose of establishing a Self-Employment Retirement Plan? - [ ] Increase personal wealth - [x] Save for retirement with tax advantages - [ ] Provide a loan against future earnings - [ ] Fund a business expansion > **Explanation:** The primary purpose of establishing a Self-Employment Retirement Plan is to save for retirement while benefiting from tax advantages.

Thank you for exploring the concept of Self-Employment Retirement Plans with our detailed article and quiz. Continue your journey in financial literacy and retirement planning!

Wednesday, August 7, 2024
Self-Employment Tax
Self-Employment Individuals Retirement Act (Keogh Plan)
Contributory Pension Plan January 1, 1
Defined-Contribution Pension Plan January 1, 1
SEP-IRA (Simplified Employee Pension Plan) January 1, 1
Self-Employment Individuals Retirement Act (Keogh Plan) January 1, 1
Simplified Employee Pension Plan (SEP) January 1, 1

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