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 are the 403(b) contribution limits?

    Determine whether 403(b) contributions meet federal guidelines. Contribution limits to this retirement plan are determined ...
  2. Can I roll over a 403b plan?

    Learn whether distributions from a 403(b) plan can be rolled over, where they can be rolled over to and what the income tax ...
  3. What is the difference between a 408 (k) plan and a 401 (k) plan?

    Learn key differences between 401(k) and 408(k) plans. Employers provide different options to help employees save for retirement, ...
  4. Is a 408 (k) the same as a Simplified Employee Pension (SEP)?

    Find out the differences and the similarities between a 408(k) retirement plan and a simplified employee pension (SEP), and ...
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. 10 Common Retirement Planning Mistakes ...
    Retirement

    10 Common Retirement Planning Mistakes ...

  2. Power Of Attorney: Do You Need One?
    Retirement

    Power Of Attorney: Do You Need One?

  3. The Top Technical Indicators For Options ...
    Options & Futures

    The Top Technical Indicators For Options ...

  4. 7 Steps To Evaluate A Financial Adviser
    Investing Basics

    7 Steps To Evaluate A Financial Adviser

  5. 6 Retirement Planning Tips For Late ...
    Retirement

    6 Retirement Planning Tips For Late ...

Trading Center