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Article added or updated:
03/30/2008 |
Keogh Plan Basics
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A Keogh or HR 10 plan is a tax-deferred retirement
savings plan for self-employed individuals. It works much like any
qualified plan such as defined benefit, money purchase, or profit
sharing plans. Keoghs were very limited when first enacted in 1963
but they provided a much needed option for self-employed persons to
save for retirement. Keoghs can be either a defined contribution or
a defined benefit plan and the maximum amount of contribution
depends upon which plan you have.
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Sole proprietorships or partnerships are eligible to
participate in a Keogh plan. These persons are not technically
considered employees and some significant special rules for
self-employed individuals covered under the plan are indicated. The
most important special rule is the definition of earned income.
Earned income is defined as the self-employed individual’s net
income from the business after all deductions, including the
deduction for the Keogh plan contribution.
There are several advantages to a Keogh plan:
contributions are deducted from the gross income
tax is deferred until the funds are withdrawn
interest income generated is tax deferred until
withdrawn
certain lump sum benefits might be eligible for
special 10-year averaging
contribution limits are more liberal than IRAs.
There are also several disadvantages to a Keogh
plan:
plan involves all the costs and complexities
associated with qualified plans
the same early withdrawal penalties of other
qualified plans applies
if the participant is a more then 5% owner,
payments must begin by April 1 of the year after reaching 70-1/2
whether or not the participant has retired.
Any type of qualified plan can be designed to
cover self-employed persons. Usually, a profit sharing or money
purchase plan is chosen to cover one self-employed person and
possibly the spouse. A self employed person can also establish a
401(k)  plan but matching contributions are not treated as elective
employer contributions and are not subject to the annual limit.
You can find more information about Keogh plans
from your financial institution or insurance company. The IRS
Publication 560 has some very good information on Keogh plans and is
updated annually.
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As always, please check with your tax professional,
CPA or lawyer
prior to acting on any advice found here. We do NOT dispense advice on
any articles contained here.
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