Keogh Plan: Retirement Savings for Self-Employed and Small Businesses

A Keogh Plan, also known as an HR-10 plan, is a tax-deferred retirement savings plan designed for self-employed individuals and unincorporated businesses, such as sole proprietorships and partnerships. The Keogh Plan allows for significant contributions, enabling business owners and their employees to save for retirement while enjoying tax advantages.

The Keogh Plan is particularly important for self-employed individuals and small business owners who want to maximize their retirement savings while benefiting from tax deductions. With its higher contribution limits compared to IRAs, the Keogh Plan provides an effective way to build a substantial retirement nest egg.

• Contribution Limits: For defined contribution Keogh Plans, contributions are limited to the lesser of 25% of compensation or $66,000 (for 2023). For defined benefit Keogh Plans, the contribution limit is based on the amount needed to provide a predetermined benefit at retirement.

• Tax Advantages: Contributions to a Keogh Plan are tax-deductible and the funds grow tax-deferred until they are withdrawn in retirement.

• Eligibility: Keogh Plans are available to self-employed individuals and partnerships, but not to incorporated businesses. Employees of the business can also participate, making it a valuable tool for attracting and retaining talent.

• Defined Contribution Keogh Plan: Similar to a 401(k), this type of Keogh Plan allows for contributions based on a percentage of income. It can be structured as a profit-sharing plan or a money purchase plan.

• Defined Benefit Keogh Plan: This type of Keogh Plan functions more like a traditional pension, where contributions are calculated to provide a specific retirement benefit based on salary and years of service.

• Decline in Popularity: With the introduction of more flexible retirement plans like SEP IRAs and Solo 401(k)s, the use of Keogh Plans has declined. However, they remain a viable option for those who already have them in place.

• Integration with Digital Platforms: Some financial institutions are offering online management tools to simplify the administration of Keogh Plans, making them easier to manage for small business owners.

• Maximize Contributions: To fully benefit from the tax advantages, consider contributing the maximum allowable amount each year.

• Combine with Other Retirement Plans: For those eligible, consider combining a Keogh Plan with a SEP IRA or Solo 401(k) to diversify retirement savings and maximize tax benefits.

• Plan for Required Minimum Distributions (RMDs): Like other retirement accounts, Keogh Plans are subject to RMDs starting at age 72. Be sure to plan for these withdrawals to avoid penalties.

The Keogh Plan is a powerful retirement savings tool for self-employed individuals and small business owners who want to maximize their contributions and enjoy tax benefits. While its popularity has waned in favor of other retirement plans, it remains a solid option for those who qualify, providing flexibility and substantial savings potential.