Keogh Plans

What is a Keogh Retirement Plan?

A keogh plan is a qualified plan designed to help self-employed workers or individuals establish a tax-deferred retirement savings vehicle.  A keogh can be established as a money purchase pension plan, defined benefit plan, or a profit sharing plan.  In either of these scenarios, participants will need to follow the same rules as corporations when it comes to contributions, withdrawals, and tax consequences. 

Who can Contribute to a Keogh?

Keoghs can be set up by sole proprietors or partnerships and is available to its owners and employees.  Full time employees who are employee's for three years or longer are automatically enrolled in the keogh plan.

Business owners should keep in mind that keogh contributions into employee accounts must be the same as what you put into your own accounts, on a percentage basis.

KEOGH Contribution Limits

For defined contribution plans (money purchase pension, profit sharing, SEP, and 401k plans), there is an annual cap of $49,000 in 2010 with a lifetime cap of $245,000.  These numbers may increase over time to account for inflation.

For participants who decide on contributing to a 403b plan as well, the aggregate contribution between the 403b and keogh cannot exceed $49,000 for 2010, $49,000 for 2009. 

Advantages of Keoghs

Keoghs offer the advantage of tax-deferred savings; therefore, you will not pay taxes on any investment gains until you withdraw the funds at retirement.  The contributions are deducted from GROSS income rather than your take home pay which allows you to lower your tax burden.  Additionally, compared to an employer sponsered 401(k) account, the contribution limits are much higher as we discussed above.  Employer sponsored plans only allow $15,500 in maximum annual contribution.

Disadvantages of Keoghs

As is the case with many other retirement plans, early withdrawal of funds will incur a penalty.  For those business owners who are strapped for cash and need the funds before retirement, you may be better off looking at a Roth IRA.  Another lesser disadvantage is in the paperwork that must be filed if you ever had more than $100,000 in your keogh.  Form 5500 or 5500-EZ will need to be filed with the IRS.

Tim Ord
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