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What is a Keogh Plan?

Money Manager | Monday, September 13th, 2010

A Keogh plan is a tax deferred pension plan, originally established through Congressional legislation in 1962 due to an effort led by Eugene Keogh. These plans are available to unincorporated businesses and people who are self-employed as a means to save for retirement. A Keogh plan is tax-deferred and can be set up as either a defined-contribution or a defined-benefit plan. However, the majority of these plans are set up to be a defined-contribution plan. Because they are a tax-deferred plan, any contributions to a Keogh plan are generally tax deductible, up to the specified contribution limits. These limits define a maximum monetary amount for yearly contributions, as well as a limit on the total percentage of a person’s annual income that can be contributed to the plan.

Are there different kinds of Keogh plans to choose from?

There are different varieties of Keogh plans available, some of which would be better suited to the retirement needs of a specific individual than another type of plan would be. For example, if a person is considered to be a high income employee, a money-purchase plan might be a good choice. There are also defined-benefit plans, and profit sharing plans. A profit sharing plan takes the company’s profitability into account, providing flexibility for annual contribution amounts. There are Keogh plans available for a wide variety of investment instruments. Just as with other retirement plans, there is a 10% penalty if the funds are withdrawn before the age of 59-1/2.

What are the advantages of a Keogh plan?

Keogh plans have higher contribution limits than many retirement plans, which can make them a popular option for proprietors and small business owners. These plans are often a good option for the small unincorporated businesses and self-employed individuals that they were designed to serve. Because of the high contribution limits on a Keogh plan, they can be a great way of accumulating a large amount of retirement funds in a shorter amount of time than it would take with many other kinds of retirement plans. This can provide a good amount of savings over time, especially when you consider that this money is tax-deferred. This can allow an individual to contribute a large amount of money, tax-deferred, to the plan during the period of time when their taxable rate would be high. The taxes would still need to be paid after retirement when the funds are distributed, but the person’s taxable rate would likely be much lower at that point in time. Defined-benefit Keogh plans can be most beneficial for individuals who are approaching retirement and are high income earners, while profit sharing Keogh plans can work well for other scenarios.
What are the disadvantages of a Keogh plan?

There tend to be higher upkeep costs for a company to operate a Keogh plan than if they were to operate a Simplified Employee Pension (SEP) plan. These plans are also generally more labor-intensive for a company to administer. The contribution for these plans must be calculated by an actuary, which can also add to the administrative burden.

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