What Is a Keogh Plan?

What You Need to Know About Keogh Plans

Financial advisor explaining a Keogh retirement plan with client in the client's home.
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A Keogh plan is a type of retirement plan for the self-employed.

Find out what Keogh plans require and how they differ from other retirement plan options.

What Is a Keogh Plan?

A Keogh plan is a tax-deferred retirement plan designed for self-employed people. Keogh plans get their name from the man who created them, Eugene Keogh. He established the Self-Employed Individuals Tax Retirement Act of 1962, also known as the Keogh Act.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) removed the distinction between Keoghs and other plans. Therefore, the Internal Revenue Code no longer refers to these plans as Keoghs. Since there is no longer a distinction between corporate and other plans, Keoghs are now simply known as HR-10s or qualified plans.

Keoghs can be set up by small businesses that are structured as limited liability companies (LLCs), sole proprietorships, or partnerships. A Keogh is similar to a 401(k) but the annual contribution limits are higher and the reporting requirements more stringent.

Self-employed people have other retirement options as well, such as Simplified Employee Pensions (SEP-IRAs), individual or solo 401(k)s, or Savings Incentive Match Plans for Employees (SIMPLE plans).

  • Alternate name: HR-10, qualified plan

How Do Keogh Plans Work?

As a qualified plan, Keoghs are available in two types: defined contribution plans and defined benefit plans.

Defined Contribution Plans

In a defined contribution plan, 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 $57,000 a year for 2020 and $58,000 for 2021, and you can deduct up to 25% of your income.

You can deduct the contributions you make for your employees or yourself if you're self-employed.

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, up to 25% of your compensation. But that contribution is fixed and can't be changed.

Defined Benefit Plans

Defined benefit plans work like a traditional pension plan: you set a pension goal for yourself and fund it. You can contribute up to $230,000 a year for 2020 and the same amount for 2021.

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.

Investing in a Keogh

As with a traditional 401(k), the money contributed to a qualified plan for the self-employed 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, depending on where you live. Plus, you may pay a 10% penalty for early distributions unless certain exceptions apply.

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

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

Keogh Plan vs. 401(k)

Keogh vs. 401(k)
Keogh 401(k)
Contributions can be made any time before filing taxes Contributions must be made by Dec. 31
Can contribute up to $230,000 depending on plan Can contribute up to $19,500 ($26,000 if over age 50)
Rigorous reporting Simplified reporting
Taxes deferred on earnings until distributions are taken Post-tax (Roth) contributions allowed
No loan allowed Can take out loan on the balance
Employer contributions Employer and employee contributions

The Balance 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.

Key Takeaways

  • A Keogh plan is a kind of retirement savings option for self-employed people.
  • Keogh plans were created in 1962, but now are referred to by the IRS as HR-10s or qualified plans.
  • Keoghs can be defined benefit or defined contribution plans.