April 23, 2012
Keogh plans are a type of retirement plan for self-employed people and small businesses. They are considered Qualified Plans by the IRS, thus they are subject to a greater amount of administrative overhead and are more difficult to set up and maintain than is an IRA or an IRA-based plan, such as a SEP-IRA. It usually will require professional assistance to set up a Keogh account.
Keoghs come in two flavors: defined contribution and defined benefit. Defined contribution plans are funded with fixed contributions from each pay check, while defined benefit plans are funded through contributions dependent on an IRS formula.
Contributions must be made pre-tax, and income tax is imposed upon withdrawal from the account. The main benefit of the Keogh plan is that it allows for a greater amount of annual contributions to the account, ie, for 2012 the limit is $50,000.00. However, it requires a large amount of business income to be able to reach this maximum contribution as contributions are limited to 25% of gross income.
Keoghs have their place, but for a self employed business owner who does have a large amount of gross income, it would likely be a better choice to use an IRA-based retirement account such as a SEP-IRA, or a SIMPLE 401k.
I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm. The rules regarding retirement accounts do change, are highly fact specific, and errors can be extremely costly. Before relying on any information given on this site, please contact a legal professional to discuss your particular situation.
Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.