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What Is a Keogh Plan? Definition, Types and Benefits


Self-employment or working for a small business may sound like a dream. However, one downside is that you likely won’t have access to a workplace retirement plan like a 401(k). Sure, you could max out the $6,500 annual IRA contribution limit, but that might not be enough to reach your savings goals. That’s where the Keogh (pronounced KEY-oh) plan can come in. A Keogh plan is a tax-deferred retirement plan for self-employed people and small businesses. If you have questions about planning for your retirement, consider working with a financial advisor.

What Is a Keogh Plan?

A Keogh plan is similar to a 401(k) – it is personal and tax-deferred – but it is for very small businesses. It provides self-employed professionals like doctors and writers with similar benefits and tax advantages as those who work in more traditional, corporate settings. To use a Keogh, a small business must be a sole proprietorship, partnership or limited liability company (LLC). Employees of small business owners may also be eligible, but the employer contributes instead of the employee.

The IRS now refers to Keogh plans as “HR 10” or “qualified plans,” though many people do still use the original term. Technically, however, “Keogh” is no longer relevant; while it used to refer only to plans for the self-employed, the law no longer distinguishes between corporate plan sponsors and other plan sponsors. Just as with an IRA, your Keogh plan can hold stocks, bonds, mutual funds and certificates of deposit.

When you make contributions to either a defined contribution or defined benefit plan, those contributions are taken out of your taxable salary. Then in retirement, distributions are taxed as ordinary income. You can withdraw by age 59.5, although you don’t have to begin withdrawing until you’re 73.

Early withdrawals are subject to taxes in addition to a 10% penalty unless there are qualifying physical or financial circumstances. If you continue working into your 70s, you can contribute, but must also take the required distribution. For tax years starting after Dec. 31, 2022, taxpayers reaching age 73 after Dec. 31, 2022, must begin mandatory distributions at age 73.

What Are the Different Types of Keogh Plans?

What Is a Keogh Plan? Definition, Types and Benefits

Similar to other types of retirement plans, there are two basic types of Keogh plans. These include a defined contribution plan and a defined benefit plan.

Defined contribution plans allow employers to define their contributions. Within this bucket there are two subtypes: profit-sharing plans and money-purchase plans. With a profit-sharing plan, you don’t actually have to show a profit for you to contribute. You decide how much to contribute to your plan each year. The amount can change from year to year as well. PSPs do come with a cap to how much you can contribute, but anything under that amount is fair game.

A money purchase plan (MPP), on the other hand, requires you to contribute a fixed percentage of income every year. This can go up to 25% of the compensation amount. You decide the percentage at the outset. You cannot change the amount as long as the company profited that year. If you change the percentage or don’t contribute one year, you could face a penalty.

The other kind of Keogh plan, a defined benefit plan, determines the annual benefits you’ll receive in retirement. A defined benefit plan works like a traditional pension, but you fund it yourself. You can contribute up to 100% of your compensation to this kind of plan. The IRS has the exact formula to calculate your contribution. Your salary, years of employment, expected return on plan assets and other stated benefits will determine the contribution amount.

Pros and Cons of a Keogh Plan

Keogh plans provide a number of benefits for self-employed people. Their contribution limits are higher, meaning more money goes in the account. This could be especially beneficial for older, high-income earners. Keogh plans offer small business owners and even some employees tax-favored retirement savings. Small business employers may also deduct the contributions made for their employees.

Keogh plans do pose some problems, though, as fairly complicated financial tools. They often require tax and financial advisors to handle the vast amount of paperwork involved. Hiring a professional is one more step a taxpayer can take to ensure that the numbers and calculations will all come out correctly.

Keogh plans also require more upkeep than either Simplified Employee Pension (SEP), simple IRAs or 401(k) plans – which means that these costs can add up. Further, certain plans will require contributions from you each year in order to meet a minimum funding standard. This still applies even if you’re a bit strapped for cash.

Keogh Plan Contribution Limits for 2023 and 2024

What Is a Keogh Plan? Definition, Types and Benefits

If you have a profit-sharing plan, you can contribute however much you choose, not including contributions for yourself. For 2023, you can contribute up to 25% of compensation or $66,000 in 2023 (up from $69,000 in 2024). If you have a money purchase plan, you contribute a fixed percentage of your income every year. The contribution amount will come from the IRS formula. Again, you can contribute up to 25% of compensation, without including your own contributions.

If you have a defined benefit plan, your contributions depend on the benefit you set and other factors. It would help if you had an actuary determine your actual amounts. Otherwise, there are no other contribution limits. When it comes to distributions, your maximum annual benefit in 2023 is $265,000 (up from $275,000 in 2024) or 100% of your compensation, whichever is less.

Bottom Line

When searching for the best retirement plans, you’ll have to carefully consider a number of plans, especially if you are self-employed or a small business owner. A Keogh plan may not be the best of the available options compared to SEP-IRAs, solo 401(k)s or individual 401(k)s. However, when looking at plans, you won’t want to forget that these qualified plan structures exist.

Retirement Savings Tips

  • No matter what type of account you use, a financial advisor can help you get your retirement savings in order. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Knowing how much money you’ll need for retirement is the start of the process. Check out our free retirement calculator to get a sense of what your goal should be.

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