'Keogh Plan' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Keogh Plans are like 401(k) plans intended for small businesses. They are distinguished from them by having higher limits than the 401(k)s do. These tax deferred pension plans can be established by businesses that are not incorporated or individuals who are self employed.
These types of plans can be one of three types. There are money purchase plans preferred by those who are high income earners. Profit sharing plans provide yearly flexibility that is dependent on the company profits. Defined benefit plans feature higher yearly minimums.
Keogh Plans are also referred to as HR(10) plans. They are permitted to invest in the same investments as IRAs and 401(k)s. This includes stocks and bonds, annuities, and certificates of deposit. The reasons these plans are so popular for sole proprietors and small business owners has to do with their higher contribution limits. A downside to them revolves around their greater maintenance costs and more burdensome administration than SEP Simplified Employee Pension plans feature.
These Keogh Plans derive their name from the creator of the concept Eugene Keogh. He put together the 1962 Self Employed Individuals Tax Retirement Act which became named for him. The plans received a name change after the Economic Growth and Tax Relief Reconciliation Act passed in 2001. This act so altered these plans that the IRS code dropped the reference name of Keogh.
They simply call them HR(10) plans now. These retirement accounts are still utilized, but have lost many followers to the solo 401(k) and the SEP IRA. The HR(10) plans still find a good fit with professionals who are highly compensated as with lawyers or dentists who are self employed. Otherwise these plans generally do not serve retirement savers better than the competing plans.
The HR(10) plans come in two different principal breakdowns. These are defined contribution and defined benefit plans. With defined contribution plans, self employed persons can decide the amount of contribution they will make every year. This can be done either through money purchase or profit sharing plans.
Money purchase requires that the profits percentage to go in the Keogh be decided at the beginning of the year. If the employed person makes profits, these contributions must be made without changes or a penalty will be assessed by the IRS. The amounts owners contribute to their profit sharing plans may be changed every year. As much as 25% of income can be deducted and contributed every year. The limit on this amount is $53,000 for 2015 and 2016.
Defined benefit plans operate much as traditional pensions would. Business owners determine a pension goal for themselves then fund it. As much as $210,000 may be contributed in a year (up to 100% of all compensation) for the years 2015 and 2016. Business owners make all contributions in both types of Keogh plans as pre-tax. This means they these contributions come out of the taxable salary before taxes are figured.
Keoghs plans are also similar to typical 401(k)s in the way that invested monies are able to be tax deferred until retirement. This may start as early as 59 ½ years old but can not be delayed until any later than 70 years of age. Any withdrawals taken before these years are federally and potentially state taxed as regular income and also penalized at 10%. Exceptions to the penalty rules exist if certain physical or financial health issues come up for the account owner before retirement.
In order to maintain a Keogh Plan, a great amount of paperwork has to be filed each year. This includes the Form 5500 from the IRS. It requires a financial professional or tax accountant’s help.
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