Keogh Plan
What Is a Keogh Plan?
A Keogh plan is a tax-deferred pension plan accessible to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit plan or a defined-contribution plan, however most plans are set as the last option. Contributions are generally tax-deductible up to a certain percentage of annual income, with applicable absolute limits in U.S. dollar terms, which the Internal Revenue Service (IRS) can change from one year to another.
Understanding the Keogh Plan
Keogh plans are retirement plans for self-employed individuals and unincorporated businesses, like sole ownerships and partnerships. In the event that an individual is an independent contractor, they can't set up and utilize a Keogh plan for retirement.
The IRS alludes to Keogh plans as qualified plans, and they come in two types: defined-contribution plans, which incorporate profit-sharing plans and money purchase plans, and defined-benefit plans, otherwise called HR(10) plans. Keogh plans can invest in similar set of securities as 401(k)s and IRAs, including stocks, bonds, certificates of deposit (CDs), and annuities.
Types of Keogh Plans
Qualified Defined-Contribution Plans
Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made consistently up to a limit. Profit-sharing plans are one of the two types of Keogh plans that permit a business to contribute up to 100% of compensation, or $58,000 starting around 2021, as indicated by the IRS. A business doesn't need to produce profits to set to the side 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 each year that is determined in plan records. In the event that a business modifies its fixed percentage, it might face punishments. The contribution limit for 2021 for money purchase plans is set at 25% of annual compensation or $58,000 ($57,000 for 2020), whichever is lower.
Qualified Defined-Benefit Plans
Qualified defined-benefit plans state the annual benefits to be received at retirement, and these benefits are normally founded on salary and long periods of employment. Contributions towards defined-benefit Keogh plans depend on stated benefits and different factors, like age and expected returns on plan assets. For 2021, the maximum annual benefit was set at $230,000 or 100% of the employee's compensation, whichever is lower.
Advantages and Disadvantages of Keogh Plans
Keogh plans were laid out through legislation by Congress in 1962 and were led by Rep. Eugene Keogh. Similarly as with other qualified retirement accounts, funds can be gotten to as soon as age 59\u00bd, and withdrawals must start by age 72, or 70\u00bd in the event that you were 70\u00bd before Jan. 1, 2020.
Keogh plans have more administrative weights and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, however the contribution limits are higher, making Keogh arrangements a well known option for some major league salary business owners. Since current tax retirement laws don't set separated incorporated and self-employed plan supports, the term "Keogh plan" is rarely at any point utilized.
Features
- Keogh plans are tax-deferred pension plans — either defined-benefit or defined-contribution — utilized for retirement purposes by either self-employed individuals or unincorporated businesses, while independent contractors can't utilize a Keogh plan.
- Profit-sharing plans are one of the two types of Keogh plans that permit a business to contribute up to 100% of compensation, or $58,000 starting around 2021.
- Keogh plans have more administrative weights and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, yet the contribution limits are higher, making Keogh arrangements a famous option for some top level salary business owners.
- Since current tax retirement laws don't set separated incorporated and self-employed plan supports, the term "Keogh plan" is rarely at any point utilized.
