Keogh plans are retirement plans with high contribution limits for self-employed individuals. When they were first formulated, Keogh plans were meant to be distinct from traditional and corporate retirement plans. Over the years, that distinction has been erased and Keogh plans are now referred to simply as “qualified” plans or HR 10 plans. The advantages of Keogh plans are that they offer higher contribution limits to account holders. The downside of Keogh plans is that they can be expensive to maintain. Have questions about Keogh Plans? Click here. Keogh plans are named after Eugene Keogh, the man who established the Self-Employed Individuals Tax Retirement Act of 1962. The IRS initially distinguished between Keogh and other plans because the latter were sponsored by corporate owners. In 2001, Congress legislation erased these distinctions and Keogh plans have become similar to tax-deferral plans like Individual Retirement Accounts (IRA). Keogh plans are also referred to as qualified plans because they offer tax advantages. Keogh plans are most popular with small businesses, sole proprietorships, and self-employed individuals with a high net worth. The popularity of such plans for this category of individuals stems from the fact that they have high contribution limits that enable businesses and self-employed individuals to save more for retirement. The contribution limits for Keogh plans in 2024 is the smaller of 25% of salary or $69,000. All contributions made to a Keogh plan are made pre-tax, meaning they reduce the individual’s overall taxable income. Withdrawals from Keogh plans prior to the age of 59.5 years are subject to a 10% penalty and are taxed as ordinary income. Distributions from the plan are made after the age of 72. There are two types of Keogh plans. They are as follows: In this type of plan, the employer (in this case, the self-employed individual or small business owner) makes periodic contributions to their or the employee’s account. Defined contribution plans are similar to other such plans, such as 401(k)s, except they have a higher contribution limit. An example of a defined contribution plan type is a profit sharing plan. In this type of plan, the employer promises a retirement benefit in the form of an annuity or monthly payments, similar to a pension, by making deductions from an employee’s salary. The benefit amount is determined through a complex IRS formula. The process to set up a Keogh plan is fairly similar to that for other retirement plans. The first step consists of choosing your provider. Banks, insurance firms, and investment consultancies are some of the places where you can set up a Keogh plan. The most common type of Keogh plan offered is the prototype plan, which basically establishes a different type of funding medium for each plan. Prototype plans can be customized to employer requirements or they can be revamped completely. Keogh plans are generally funded through trusts specifically established for the purpose. Keogh plans are subject to a different set of rules as compared to traditional retirement accounts. For starters, they are not subject to traditional fiduciary standards that mandate standards of care and conduct. This means that plans managed by self-employed individuals without any common law employees are not subject to the same set of standards that are applied to managers of other pension plans. For example, if a broker makes an incorrect trade on behalf of a client who has a Keogh plan, then the latter cannot sue the former for the plan. While they have high contribution limits, Keogh plans are subject to several restrictions by the IRS. Here are a couple of them: The advantages of Keogh plans are as follows: The disadvantages of Keogh plans are as follows:Basics of Keogh Plans
Types of Keogh Plans
Defined Contribution Plans
Defined Benefit Plans
How to Set Up a Keogh Plan
Keogh Plan Dos and Don’ts
Pros and Cons of Keogh Plans
Keogh Plans FAQs
Keogh plans are retirement plans with high contribution limits for self-employed individuals.
The contribution limits for Keogh plans in 2024 is the smaller of 25% of salary or $69,000. All contributions made to a Keogh plan are made pre-tax, meaning they reduce the individual’s overall taxable income.
Keogh plans are not subject to traditional fiduciary standards that mandate standards of care and conduct. This means that plans managed by self-employed individuals without any common law employees are not subject to the same set of standards that are applied to managers of other pension plans.
There are two types of Keogh plans: defined contribution and defined benefit.
IRS rules dictate that the plan cannot lend any part of the principal or income to its owner. It also can't use funds from the plan to purchase property. Additionally, funds from the plan cannot be used to pay compensation to employees or owners.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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