Keogh Plan: Retirement for Self-Employed & Small Businesses

A Keogh Plan, also referred to as an HR-10 plan, is a tax-deferred retirement savings vehicle specifically designed for self-employed individuals and unincorporated businesses, including sole proprietorships and partnerships. Established under Section 401 of the Internal Revenue Code, the Keogh Plan allows for substantial contributions, enabling business owners and their employees to effectively save for retirement while reaping significant tax benefits. This plan is particularly advantageous for high-income earners seeking to maximize their retirement savings.

The Keogh Plan holds particular significance for self-employed individuals and small business owners aiming to enhance their retirement savings while taking advantage of valuable tax deductions. With contribution limits that exceed those of traditional Individual Retirement Accounts (IRAs), the Keogh Plan serves as an effective mechanism for building a robust retirement nest egg. By enabling higher contributions, it empowers business owners to secure their financial future and potentially reduce their taxable income in the present. This is especially critical in an era where retirement savings are increasingly important due to longer life expectancies and rising living costs.

• Contribution Limits: For defined contribution Keogh Plans, contributions are capped at the lesser of 25% of compensation or $69,000 for the tax year 2025. For defined benefit Keogh Plans, the limit is determined by the amount necessary to provide a specified benefit at retirement, which can be a more complex calculation involving factors like age and salary history.

• Tax Advantages: Contributions made to a Keogh Plan are tax-deductible, allowing business owners to lower their taxable income. Furthermore, the invested funds grow tax-deferred until withdrawal during retirement, meaning that taxes are only paid upon distribution, often at a lower rate than during peak earning years.

• Eligibility: Keogh Plans are accessible to self-employed individuals and partnerships but are not available to incorporated businesses. Importantly, employees of the business can also participate, making the Keogh Plan a strategic tool for attracting and retaining skilled employees, thereby enhancing overall business competitiveness.

• Defined Contribution Keogh Plan: This type of Keogh Plan operates similarly to a 401(k), allowing contributions based on a percentage of income. It can be established as a profit-sharing plan or a money purchase plan, providing flexibility in how contributions are structured and made.

• Defined Benefit Keogh Plan: Functioning more like a traditional pension, this type of Keogh Plan calculates contributions to ensure a specific retirement benefit is provided, based on factors such as salary and years of service. This can offer predictability for retirement income, an attractive feature for some business owners. The maximum annual benefit payout is the lesser of $275,000 or 100% of the participant’s average compensation for their highest three consecutive years of earnings. Moreover, contributions can exceed the defined contribution plan limits depending on the participant’s retirement goals and age.

• Available for self-employed individuals, sole proprietors, partnerships, and small business owners with no corporate structure.

• Contributions are tax-deductible, reducing taxable income.

• Investments grow tax-deferred, meaning taxes are only paid upon withdrawal.

• Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty.

• Required Minimum Distributions (RMDs) begin at age 73.

• Keogh Plans require formal plan documentation and annual filings, making them more complex than SEP IRAs or Solo 401(k)s.

• Decline in Popularity: The introduction of more flexible retirement plans, such as SEP IRAs and Solo 401(k)s, has led to a decline in the popularity of Keogh Plans. However, they continue to serve as a viable option for those who have established them, especially for individuals with higher income levels who can benefit from the larger contribution limits.

• Integration with Digital Platforms: Financial institutions are increasingly offering online management tools aimed at simplifying the administration of Keogh Plans. These digital platforms enhance the user experience, making it easier for small business owners to manage their retirement plans efficiently, monitor contributions and ensure compliance with IRS regulations.

• Maximize Contributions: To fully leverage the tax advantages, business owners should aim to contribute the maximum allowable amount each year. Regularly reviewing contribution limits and adjusting as income fluctuates can significantly enhance retirement savings.

• Combine with Other Retirement Plans: For those eligible, it may be beneficial to combine a Keogh Plan with other retirement vehicles, such as a SEP IRA or Solo 401(k). This strategy allows for diversified retirement savings, potentially maximizing tax benefits and providing flexible withdrawal options.

• Plan for Required Minimum Distributions (RMDs): Like other retirement accounts, Keogh Plans are subject to required minimum distributions beginning at age 72. It’s crucial to plan for these withdrawals to avoid hefty penalties, ensuring a smooth transition into retirement without financial strain.

The Keogh Plan remains a powerful retirement savings tool for self-employed individuals and small business owners seeking to maximize their contributions while enjoying substantial tax benefits. Despite a decline in popularity due to the emergence of alternative retirement plans, it continues to be a solid option for those who qualify. By offering flexibility and significant savings potential, the Keogh Plan can play a pivotal role in securing a financially stable retirement.