What Is a Keogh Plan?

Is a Keogh Plan Right for You?

Financial advisor explaining a Keogh retirement plan with client in the client's home..
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A Keogh (pronounced kee-yo) is a type of retirement plan designed for self-employed individuals and their employees. It can be set up by small businesses that are structured as LLCs, sole-proprietorships, or partnerships. A Keogh is similar to a 401(k) for very small businesses, but the annual contribution limits are higher than 401(k) limits.

Keogh Basics

Keogh plans get their name from the man who created them, Eugene Keogh, who established the Self-Employed Individuals Tax Retirement Act of 1962, aka the Keogh Act. The plans were changed by the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA). They've changed so much that the Internal Revenue Code no longer refers to them as Keoghs. They're now known as HR 10s or qualified plans.

The Keogh structures still exist, but they've lost popularity compared to plans like SEP-IRAs or individual or solo 401(k)s. A Keogh may be right for a highly paid professional, such as a self-employed dentist or lawyer, but the cases in which these plans make sense are specific and fairly rare.

Defined Contribution Plans

You define the contribution that will be made each year, and you can make contributions through profit-sharing or money purchase. With profit-sharing, you can contribute up to $54,000 a year as of 2019, and you can deduct up to 25 percent of your income. The amount you choose to contribute to a profit-sharing plan can change each year. With a money-purchase plan, you determine at the outset the percentage of profits to be placed in the Keogh. But that contribution is required if there are profits and it can't be changed.

If the contribution isn't made, you'll face a penalty.

Defined Benefit Keogh

It works like a traditional pension plan. You set a pension goal for yourself, fund it, and can contribute up to $255,000 a year as of 2019. It makes it a wise choice for highly compensated self-employed individuals who want to contribute some extra dollars before retirement.

Contributions to each type of plan are made on a pre-tax basis, so they're taken out of your taxable salary. You'll pay taxes each pay period on less and have the option of taking an upfront deduction on your annual income tax return instead.

Investing in a Keogh

As with a traditional 401(k), the money contributed to a Keogh can be invested tax-deferred until retirement, beginning at age 59 1/2 but no later than age 70. Withdrawals made before that time are taxed on a federal and possibly state level, plus you'll pay a 10 percent penalty. But some exceptions exist to these rules, depending on your physical and financial health.

The money in a Keogh plan can be invested in stocks, bonds, mutual funds, and other types of investments.

A Keogh plan must be established before the end of the year in which you wish to receive the deduction. But, you can make Keogh contributions for the prior year when you file your tax return by mid-April or, if you file an extension, by mid-October.

Keogh plans require a good deal of annual paperwork. IRS Form 5500 must be filed each year, and it requires the help of a tax accountant or a financial professional. It is one of the primary reasons that Keoghs can be complicated for the average self-employed individual. Talk to a financial or tax advisor before establishing a Keogh plan.

Jacara does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.