Keogh plan

Keogh plans are a type of retirement plan for self-employed people and small businesses in the United States.

Named for U.S. Representative Eugene James Keogh of New York, they are sometimes called HR10 plans. IRS Publication 560 refers to them as “Qualified Plans.” They are different from Individual Retirement Accounts (IRAs).

There are 2 basic types of Keogh Plan: defined-benefit, and defined-contribution.

In a defined-contribution plan, a fixed contribution (percentage of total paycheck or a fixed sum) is made per pay period. It may be set up as a profit-sharing plan, where the pension that one can withdraw after retirement depends on how much they invested in the plan while they worked.

The defined-benefits plan is more complex. It relies on an IRS formula to calculate the rate of contributions.

In either case, as in other retirement plans such as 401(k)s and IRAs, the funds in the plan can be invested in , bonds, mutual funds, etc.

The main benefit of a Keogh Plan vs. other retirement plans is that a Keogh Plan has higher contribution limits for some individuals. For 2011, employees can generally contribute up to $16,500 per year, and the employer can contribute up to $32,500, for a total annual contribution of $49,000. The total contribution cap is $50,000 for 2012, $51,000 for 2013, $52,000 for 2014, and up to 25% of compensation or $53,000 in 2016, whichever is lower.

A person with a Keogh Plan can also contribute to an IRA (traditional or Roth).

Keogh Plans are not as common as most other retirement plans because there are several limitations to Keogh Plans.

Compared to other retirement plans (traditional IRA, SIMPLE IRA, etc.), Keogh Plans require more administrative paperwork. While most small business owners can manage to set up other plans themselves, a Keogh Plan requires complex calculations and professional help to establish. They've been largely replaced by SEP IRAs, which have the same contribution limits but much less paperwork.

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