Key Takeaways
- Retirement plan for self-employed individuals.
- Allows higher contribution limits than IRAs.
- Offers tax-deferred growth on contributions.
- More complex and costly to manage.
What is Keogh Plan?
A Keogh plan is a tax-deferred retirement account specifically designed for self-employed individuals and unincorporated businesses to maximize retirement savings. Established under the Self-Employed Individuals Tax Retirement Act of 1962, it allows higher contribution limits than many other retirement options.
This plan is ideal if you want to shelter a significant portion of your income from capital gains tax while saving for retirement.
Key Characteristics
Keogh plans offer unique features tailored to self-employed professionals and small business owners:
- Tax-Deferred Growth: Contributions and earnings grow tax-deferred until withdrawal, enhancing compound growth potential.
- Higher Contribution Limits: You can contribute up to 25% of your net self-employment income, exceeding limits of traditional IRAs.
- Two Plan Types: Choose between defined benefit or defined contribution plans depending on your retirement goals.
- Eligibility Requirements: Available only to self-employed individuals and unincorporated businesses.
- Complex Administration: Often requires professional advice for compliance and actuarial calculations.
How It Works
Keogh plans allow you to make pre-tax contributions based on your earnings as a self-employed individual. Defined contribution plans let you allocate a fixed percentage of your income annually, while defined benefit plans promise a fixed retirement benefit calculated through IRS formulas.
The tax advantages stem from deferring income taxes until you withdraw funds, which lets your investments grow without immediate tax drag. Compared to other retirement vehicles, a Keogh plan may enable higher annual savings, especially if your self-employment income is substantial. Professional guidance can help you navigate the plan rules and optimize contributions.
Examples and Use Cases
Keogh plans suit a variety of self-employed professionals and small business owners looking for robust retirement savings:
- Healthcare Professionals: Doctors and dentists often use Keogh plans to maximize retirement contributions beyond standard IRAs.
- Writers and Consultants: Independent contractors and freelancers with fluctuating income can adjust contributions annually.
- Small Business Owners: Companies like Delta and American Airlines historically offered retirement plans for their self-employed contractors, though Keogh plans are typically for smaller, unincorporated entities.
- Investment Focus: You might consider combining your Keogh plan with low-cost index funds by exploring options like the best low-cost index funds to optimize growth.
Important Considerations
Keogh plans have advantages but also come with complexities and eligibility limits. They require strict adherence to IRS regulations and often involve higher administrative costs than simpler options such as SEP IRAs or solo 401(k)s.
Before committing, evaluate your self-employment income and long-term retirement goals. Also, assess your ability to pay taxation on withdrawals during retirement. Consulting financial experts can ensure the plan aligns with your needs and leverages tax advantages effectively.
Final Words
Keogh plans offer self-employed individuals the opportunity to save significantly more for retirement through higher contribution limits. To maximize your retirement savings, review your income and compare Keogh plan options with other retirement accounts to determine the best fit for your financial goals.
Frequently Asked Questions
A Keogh Plan is a tax-deferred retirement account specifically designed for self-employed individuals and unincorporated businesses, offering higher contribution limits compared to many other retirement savings options.
There are two main types of Keogh Plans: Defined Benefit Plans, which promise a fixed retirement benefit based on salary and years of service, and Defined Contribution Plans, which allow contributions based on a percentage of income and include profit-sharing and money-purchase plans.
For defined contribution Keogh Plans, self-employed individuals can contribute up to 25% of their net earnings, with a maximum of around $69,000 to $70,000 in 2025-2026. Defined benefit plans have different limits based on a formula and can provide up to $245,000 in annual retirement benefits as of 2022.
The key advantages include higher contribution limits than traditional IRAs, allowing self-employed individuals to maximize retirement savings, as well as tax-deferred growth on contributions and earnings, which aren't taxed until withdrawal in retirement.
Yes, Keogh Plans are generally more complex and costly to maintain than alternatives like SEP IRAs or solo 401(k)s, often requiring professional assistance. They also have strict IRS rules that must be followed to maintain their qualified status and tax benefits.
Keogh Plans are available only to self-employed individuals and unincorporated businesses, making them ideal retirement savings options for sole proprietors, partnerships, and other self-employed professionals.
Yes, in defined contribution Keogh Plans, both the self-employed individual and their business can make contributions, which can help accelerate the growth of retirement savings.
