Many Americans dream of being self-employed, but it’s crucial to save for retirement while building your business. As a self-employed individual, you may not have access to traditional employer-sponsored retirement plans. This is where a Keogh plan can be beneficial.
A Keogh plan, also known as an H.R. 10 plan or Qualified Plans for Self-Employed Individuals, is a tax-deferred retirement plan available to self-employed individuals and unincorporated businesses like sole proprietorships and LLCs.
These plans can function similarly to pension plans, profit-sharing plans, or 401(k)s, but they are more complex than SEP IRAs or solo 401(k)s. They often require assistance from financial professionals such as actuaries, tax advisors, and financial advisors. Despite the complexity, Keogh plans can be suitable for highly paid self-employed individuals.
Let’s delve deeper into how Keogh plans work and what you need to know if you’re considering one.
How Keogh plans work
There are two main types of qualified plans: defined benefit plans and defined contribution plans. Both types allow retirement funds to grow tax-free, but each has its own rules, structure, and ideal use cases.
Defined benefit plans
Defined benefit plans function like traditional pensions, providing an annual retirement benefit based on your prior salary. Contributions are usually paid quarterly, and there is a minimum funding standard. These plans can be complex to administer, often requiring professional support for tasks like actuarial calculations.
Defined contribution plans
Qualified defined contribution plans include profit-sharing plans and money purchase pension plans. These plans have contribution limits and employer contribution caps, making them more flexible than defined benefit plans.
Who is eligible for a Keogh plan?
Keogh plans are typically suitable for sole proprietors and high-earning individuals. However, other retirement plans like SEP IRAs and solo 401(k)s may be more popular and beneficial for some self-employed individuals.
What is the maximum contribution to a Keogh plan?
For Keogh defined benefit plans, there are no annual contribution limits, but contributions should be calculated by an actuary. Defined contribution Keogh plans have an employer contribution limit of $69,000, with employee contributions depending on the plan.
What is the difference between a Keogh plan and a 401(k)?
Keogh plans and 401(k)s are both tax-advantaged retirement accounts, but they differ in contribution limits, employer contributions, complexity, and IRS rules.
Bottom line
For most self-employed individuals, SEP IRAs or solo 401(k)s are ideal retirement options. However, for high-income small business owners seeking a pension plan, a Keogh plan could be suitable. Consulting a financial advisor is recommended for anyone considering retirement options.