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. How do I save for retirement as a self-employed individual?

    What are my options for saving for retirement? I was thinking about starting an IRA. ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
Related Articles
  1. Retirement

    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

    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.
  4. Retirement

    Retirement Planning for the Self-Employed

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

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  6. 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.
  7. Retirement

    IRA Contribution Limits in 2016

    Find out about the 2016 limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
  8. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  9. Retirement

    8 Essential Tips For Retirement Saving

    These eight tips can help your retirement savings grow.
  10. Financial Advisor

    The Deadline for Catch-Up Contributions: April 18

    Those who want to maximize their retirement plan contributions can still make a prior-year contribution for 2015. Don't miss the April 18th deadline.
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. Retirement Contribution

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

    A retirement plan that may be established by employers, including ...
  6. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center