What is the 'Keogh Plan'

A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined as contributions. Contributions are generally tax deductible up to a certain percentage of annual income with applicable absolute limits in U.S. dollar terms, which can be changed from year to year by the U.S. Internal Revenue Service (IRS).

BREAKING DOWN 'Keogh Plan'

Keogh plans represent retirement plans for self-employed people and unincorporated businesses, such as sole proprietorship and partnerships. If an individual is an independent contractor, he cannot set up and use a Keogh plan for retirement.

The IRS refers to Keogh plans as qualified plans, and they come in two types. The first type of plans are defined-benefit plans, which include profit-sharing plans and money purchase plans. The second type of plans are defined-contribution plans. Also known as an HR(10) plan, Keogh plans can invest in the same set of securities as 401(k)s and IRAs, including stocks, bonds, certificates of deposit (CDs) and annuities.

Qualified Defined-Contribution Plans

Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made on a regular basis up to a limit. Profit-sharing plans are one of the two types of Keogh plans that allow a business to contribute up to 25% of compensation or $53,000 in 2016. A business does not have to generate profits to set aside money for this type of plan.

Money purchase plans are less flexible compared to profit-sharing plans and require a business to contribute a fixed percentage of its income every year that is specified in plan documents. If a business alters its fixed percentage, it may face penalties. The contribution limit in 2016 for money purchase plans is set at 25% of a compensation or $53,000, whichever is lower.

Qualified Defined-Benefit Plans

Qualified defined-benefit plans state the annual benefits to be received at retirement, and these benefits are typically based on salary and years of employment. Contributions towards defined-benefit Keogh plans are based on stated benefits and other factors, such as age and expected returns on plan assets. The IRS stated that in 2016, the maximum annual benefit is set at $210,000 or 100% of the employee's compensation, whichever is lower.

Advantages and Disadvantages of Keogh Plans

Keogh plans were established through legislation by Congress in 1962 and were spearheaded by Rep. Eugene Keogh. As with other qualified retirement accounts, funds can be accessed as early as age 59.5, and withdrawals must begin by age 70.5.

Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners. Because current tax retirement laws do not set apart incorporated and self-employed plan sponsors, the term "Keogh plan" is rarely used.

RELATED TERMS
  1. IRS Publication 560: Retirement ...

    A document published by the Internal Revenue Service (IRS) that ...
  2. Cash Balance Pension Plan

    A pension plan under which an employer credits a participant's ...
  3. Defined-Contribution Plan

    A retirement plan in which a certain amount or percentage of ...
  4. Pension Plan

    A type of retirement plan, usually tax exempt, wherein an employer ...
  5. Qualified Retirement Plan

    A plan that meets requirements of the Internal Revenue Code and ...
  6. Plan Participant

    A plan participant either contributes into a pension plan or ...
Related Articles
  1. 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.
  2. 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.
  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

    How Does a Pension Plan Work?

    A pension plan is a savings plan maintained by an employer on behalf of its employees for their retirement.
  6. Personal Finance

    The Demise Of The Defined-Benefit Plan

    Experts are making bleak predictions for your post-work years. Be prepared and plan for your future.
  7. Retirement

    More Pension Plans in the Deep Freeze

    A growing number of Fortune 500 companies have sent their defined-benefit pension plans to the deep freeze. What employees should do next.
  8. Financial Advisor

    Retirement Planning for the Self-Employed

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

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  10. Financial Advisor

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
RELATED FAQS
  1. What is the difference between a Keogh and an IRA?

    The Keogh plan, or HR10, is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. Who bears the investment risk in 401(k) plans?

    Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad ... Read Answer >>
  5. What is the difference between a 401(k) plan and a 457 plan?

    Discover how 401(k) plans are privately offered employee retirement plans, while 457 plans are typically available to public ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center