Defined Contribution Keogh Plan: A Retirement Guide

A Defined Contribution Keogh Plan is a retirement savings plan specifically tailored for self-employed individuals and small business owners. Unlike traditional pension plans, which promise a specific payout upon retirement, a Keogh plan allows participants to contribute a percentage of their income into an investment account. The funds then grow on a tax-deferred basis until retirement, enabling significant savings potential.

Understanding the components of a Keogh plan is essential for maximizing its benefits:

• Eligibility: Generally, any self-employed individual or small business owner can establish a Keogh plan, provided they have earned income from their business.

• Contribution Limits: Keogh plans offer higher contribution limits than IRAs. For 2025, the total annual contribution limit for defined contribution Keogh Plans is $70,000 or 100% of compensation, whichever is less. For self-employed individuals, contributions are based on net earnings from self-employment, calculated after deducting half of the self-employment tax and contributions to the plan itself. This typically results in a contribution rate of approximately 20% of net earnings.​ It’s important to note that Keogh Plans do not permit catch-up contributions for individuals aged 50 and over. Additionally, the annual compensation limit that can be considered for contributions is capped at $350,000.

• Investment Options: Participants can choose from various investment options, including stocks, bonds, mutual funds and other securities, allowing for a diversified portfolio.

• Tax Benefits: Contributions are tax-deductible, reducing your taxable income for the year. Additionally, the investments grow tax-deferred until withdrawal, which typically occurs during retirement.

There are two primary types of Keogh plans:

• Profit-Sharing Plans: These plans allow employers to make discretionary contributions to employees’ accounts based on the company’s profits. Contributions can vary each year, providing flexibility.

• Money Purchase Plans: Unlike profit-sharing plans, money purchase plans require fixed contributions to be made each year, regardless of the company’s profitability. This can provide a more predictable retirement savings strategy.

As we move forward, several trends are shaping the future of Keogh plans:

• Increased Popularity Among Gig Workers: With the rise of the gig economy, more self-employed individuals are recognizing the benefits of Keogh plans for retirement savings.

• Integration with Financial Technology: Many providers are now offering digital platforms that simplify the management of Keogh plans, making it easier for business owners to track contributions, investments and performance.

• Focus on Sustainable Investments: There is a growing trend toward socially responsible investing within Keogh plans, allowing participants to align their investments with their values.

To make the most of a Keogh plan, consider these strategies:

• Maximize Contributions: Aim to contribute the maximum allowable amount each year to take full advantage of tax benefits and accelerate your retirement savings.

• Diversify Investments: Spread your investments across various asset classes to mitigate risk and enhance growth potential.

• Regularly Review Your Plan: Periodically assess your investment strategy and contribution levels to ensure they align with your retirement goals.

Here are a few illustrative examples of how a Keogh plan can work:

• Example 1: A self-employed graphic designer earns $100,000 in a year. They can contribute up to $20,000 (20% of net earnings) to their Keogh plan, significantly reducing taxable income while saving for retirement.

• Example 2: A small business owner with fluctuating profits opts for a profit-sharing Keogh plan. In a profitable year, they contribute a larger amount, while in leaner years, they can choose to contribute less, providing flexibility.

A Defined Contribution Keogh Plan serves as an excellent retirement savings vehicle for self-employed individuals and small business owners. With its tax advantages, high contribution limits and flexibility, it offers a robust way to build a secure financial future. As trends evolve and more people enter the self-employment arena, understanding and utilizing a Keogh plan can make a significant difference in retirement readiness.