What is the difference between a Keogh and an IRA?

By Steven Merkel AAA
A:

The Keogh plan, or HR10, is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed persons. The Keogh plan, named after U.S. Representative Eugene James Keogh, was established by Congress in 1962 and expanded into the Economic Recovery Tax Act of 1981. Keoghs can be either defined-contribution or defined-benefit plans. Contribution maximums vary among Keogh Plans, which include profit-sharing, money purchase and combination plan options.

Keogh plans are popular among sole proprietors and small businesses with high incomes because they feature relatively high contribution limits at the smaller of 25% of salary, or $46,000 (the maximum contribution for 2008). Contributions to Keoghs are made pretax, which reduces the taxable income of the contributor. Self-employed individuals generally can deduct the entire yearly Keogh contribution amount, including contributions made on behalf of employees. The interest, dividends and capital gains earned in Keoghs grow tax-deferred until the beginning of withdrawals.

The Individual Retirement Account (IRA), or Traditional IRA, can be established by any individual saving for retirement. For 2008, the maximum contribution is $5,000. For persons age 50 or older, an additional $1,000 in catch-up contributions can be made per year. Employers are not permitted to make contributions on behalf of employees, because funds contributed by individuals may be tax-deductible. Both Keoghs and IRAs require distributions at age 70.5.

The primary differences between the two plans are contribution limits and individual versus employer contributions. Post-tax contributions can be made to IRA accounts, but Keogh contributions offer higher tax deductions. In addition, Keoghs offer plan choices geared toward self-employed individuals or small business owners, whereas IRAs are restricted to individuals.

(For more on this topic, read the Individual Retirement Accounts special feature.)

This question was answered by Steven Merkel.

RELATED FAQS

  1. What is the difference between a Traditional and a Roth IRA?

    The main difference between a Traditional and a Roth IRA is the way contributions are deducted for tax breaks. Whereas contributions ...
  2. Should I collect early Social Security?

    The earliest age that you can start receiving social security benefits is age 62. Full retirement was age 65 for many years; ...
  3. I am in my mid thirties and have nothing invested for retirement. Is it too late ...

    It is never too late to start saving for retirement. Even starting at age 35 means you will have more than 30 years to save.The ...
  4. I work for two companies. How much can I contribute to each company's SIMPLE IRA?

    It depends.If you work for two companies that are unrelated and unaffiliated, you can make salary deferral contributions ...
RELATED TERMS
  1. Gold IRA

    Definition of Gold IRA
  2. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  6. Short Put

    A type of strategy regarding a put option, which is a contract ...
comments powered by Disqus
Related Articles
  1. An Overview Of The Pension Benefit Guaranty ...
    Retirement

    An Overview Of The Pension Benefit Guaranty ...

  2. Business Owners: Rules For Qualified ...
    Entrepreneurship

    Business Owners: Rules For Qualified ...

  3. Keeping Track Of Retirement Plan Assets
    Retirement

    Keeping Track Of Retirement Plan Assets

  4. Tips On How To Use IRAs To Boost Retirement ...
    Retirement

    Tips On How To Use IRAs To Boost Retirement ...

  5. Tax-Saving Advice For IRA Holders
    Taxes

    Tax-Saving Advice For IRA Holders

Trading Center