The Keogh plan (pronounced KEY or KEE-oh) or HR10, is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed persons. The term itself is now outdated - the Internal Revenue Service (IRS) calls them "Qualified Plans."
There are two types of Keoghs: defined contribution plans also called HR(10) plans and defined-benefit plans. The latter includes money purchase plans and profit sharing plans.
Keogh plans have access to similar sets of securities, like bonds, stocks or annuities, like an IRA or a 401(k) plan.
Keogh contribution plans are popular among sole proprietors and small businesses and they feature relatively high contribution limits at the smaller of 25% of salary, or $56,000 (the maximum contribution for 2019). A defined benefit plan is set up similar to a pension. In 2019, the IRS allows you to contribute up to $225,000.
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 History of the Keogh
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 and morphed again in 2001. 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. Before the change in tax laws in 2001, Keogh's were the go-to retirement plans for the self-employed, but since the laws changed and "no longer distinguishes between corporate and other plan sponsors, the term is seldom used," according to the Internal Revenue Service.
IRA vs. Keogh
The Individual Retirement Account (IRA), or Traditional IRA, can be established by any individual saving for retirement. For 2019 the maximum contribution is $6,000. 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 1/2 and you can access funds as early as 59 1/2 years of age.
You can also convert a Keogh into a Roth IRA, but you must roll over the funds you remove from a Keogh within a 60-day window to avoid being hit with potential penalties for early withdrawal.
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. When considering between a Simplified Employee Pension (SEP) or a Keogh, bear in mind that Keogh or Qualified Plans cost more to maintain, and come with more paperwork. The upshot: Keogh's contribution limits are much higher, and may provide more of a cushion in retirement depending on annual contributions.
The Bottom Line
Retirement plans are an essential piece of any portfolio. After all, securing ones future financial freedom is one way to relieve stress in your later years. To view some of the best places to start one of these accounts, you can check out Investopedia's lists of the best brokers for IRAs and the best brokers for Roth IRAs.