What Is a Keogh Plan and How Does It Work?

Keogh plan is a retirement pension plan provided to self-employed people and independent companies for their retirement. The plan could be set up as either a definedbenefit or a defined-contribution plan, with many opting for the second configuration. The plans are still being utilized by individuals in the USA, however with the beginning of 401(k) plans, they have reduced in popularity.

Keogh Plan – tax deferred plan

Key Points briefly

  • Self-employed persons and unincorporated enterprises may opt in Keogh plans, that have the benefit of being tax-deferred pension plans and may be either defined-benefit or defined-contribution in nature.

  • Independent contractors are not permitted to participate in Keogh plans for retirement reasons.

  • The plans enable a company to share profits under two plans and also pay upto 100% of pay or $58,000 as on 2021.

  • Since current tax retirement regulations do not differentiate between incorporated and self-employed plan sponsors, the phrase "Keogh plan" is seldom heard or seen.

What are types of Keogh Plan?

The first is a defined benefit plan

An individual's defined benefit plan is designed on a structured payment contribution system, which is either a specific quantity of money or a predetermined percentage of his or her income. It is completed at the end of each payment quarter, for example Mar – September etc.

Plan with a Defined Contribution Plan

In addition, a defined contribution plan is also available, which is substantially more complicated. The fundamental structure of a defined contribution plan authorizes a person to set away a proportion of his or her income for retirement purposes. This amount is calculated using formula and cannot be a fixed amount. It is known as HR10.

For both the plans, individuals of Keogh Plan can invest in financial security investments like bonds, debentures, etf, equities etc.

What are the limitations of Keogh Plan?

Keogh plans are less widespread than virtually all other forms of retirement plans, and this is true once again. Moreover, it is subjected more regulations and will have to follow restrictions.

Individuals might be put off with the amount of paperwork and administrative tasks this plan requires. All the trips to the office may not be for everyone, especially when other retirement plans are processed far more easily. This plan still requires more complx procedures.

There is a limitation that restricts independent contractors on Keogh plan that might eliminate a vast majority of its potential clients. It could only be utilized by people who are self-employed or who have an independent firm.

In addition, there is a rule that stipulates payments must only be made pre-tax, which means that the money would be deducted from one’s taxable income of the year. Despite the rule all taxes are to be paid in totality again during retirement.

Updated on: 02-Jul-2021


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