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. I am the beneficiary of an IRA and a Keogh. Can I combine them into one plan?

    It depends. If you are a "spouse beneficiary" for both the Keogh and the IRA, then you may transfer or roll over the inherited ... Read Answer >>
  2. What are the Simplified Employee Pension (SEP) IRA contribution limits?

    Discover the 2014 employers' SEP IRA eligible contribution limits for employees and those who are self-employed. These limits ... Read Answer >>
  3. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Find out why contributions to IRA, Roth IRA and 401(k) retirement savings plans are limited by the IRS, including what the ... Read Answer >>
  4. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ... Read Answer >>
  5. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
Related Articles
  1. Financial Advisor

    Keough vs. SEP: Small Business Retirement Plans

    Running your own company can lead to great personal satisfaction, but it can make planning for retirement a huge headache. Here are two plan options.
  2. Financial Advisor

    SEP vs. Keogh Plans: Which is Right for You?

    SEP and Keogh plans each have their pros and cons. Here's how to choose which one is right for you.
  3. Retirement

    An Introduction To The Keogh Retirement Plan

    Learn more about this popular defined-contribution retirement plan that many business owners, proprietors, and self-employed people can benefit from.
  4. Retirement

    Hey Self-Employed, Are You Making The Most Of Your Retirement Options?

    Even if you own your own business, it is still very important to save for retirement, and to understand your options for doing so.
  5. Retirement

    Self Employed? Avoid These 3 Retirement Mistakes

    Having a strategy for retirement is particularly important when you're self-employed, as there are certain pitfalls you must watch out for along the way.
  6. Retirement

    Saving For Retirement When You're Not Working

    Lack of full-time employment can make saving for retirement more difficult, but there are some vehicles that can help.
  7. Financial Advisor

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  8. Retirement

    Top Tips For Maxing Out Your Retirement Account

    If you are behind in your retirement plan contributions for the year, this is the time to figure out how to catch up.
  9. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  10. Retirement

    Retirement Planning For The Self-Employed

    Recent studies show that most self-employed Americans are saving little, if anything, for retirement. But making an investment in yourself is worth it.
RELATED TERMS
  1. Keogh Plan

    A tax deferred pension plan available to self-employed individuals ...
  2. IRS Publication 560: Retirement Plans for Small Business (SEP, SIMPLE and Qualified ...

    A document published by the Internal Revenue Service (IRS) that ...
  3. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  4. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  5. Retirement Contribution

    A monetary contribution to a retirement plan. Retirement contributions ...
  6. Savings Incentive Match Plan For Employees Of Small Employers - SIMPLE

    A retirement plan that may be established by employers, including ...
Hot Definitions
  1. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  2. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  3. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  4. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  5. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  6. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
Trading Center