Definition: A Keogh plan is a type of retirement plan for self-employed individuals or unincorporated businesses. This type of plan is now known as an “HR-10” or “qualified retirement plan.”
How does a Keogh plan work?
A Keogh plan (K-1) is a tax-deferred retirement plan for self-employed individuals and unincorporated businesses. Keogh plans are named after U.S. Representative Eugene Keogh from New York, who played a significant role in enacting the retirement tax legislation for self-employed individuals in 1962. Thanks to his efforts, the legislation became known as the Keogh Act.
Types of Keogh Plans
There are two types of Keogh plans available: defined contribution plan and defined benefit plan.
Defined Contribution Plan
In a defined contribution plan, you determine the amount you will contribute to the fund annually. There are two ways to define the amount: profit-sharing (where your business is the sole contributor) or cash purchase (where you contribute a fixed amount of your income annually to the plan).
Defined Benefit Plan
Defined benefit plans operate like traditional retirement plans: you set a retirement goal for yourself and fund it. Your annual benefits cannot exceed 100% of your average earnings over the three consecutive years with the highest earnings or $265,000 in 2023 (or $245,000 in 2022), whichever is lower.
Investing in a Keogh Plan
Like a 401(k), you can defer taxes on the amount you invest in a Keogh plan until retirement. You can start withdrawing funds after you reach age 59½, but the maximum must be taken by April 1 of the year following the year you turn 72. Withdrawals made before this time are taxed at the federal level. They may also be taxed by the state you live in. You may have to pay a 10% penalty on early withdrawals unless a specific exception applies.
Keogh Plan vs 401(k)
There are differences between Keogh plans and 401(k) plans in terms of contributions, reporting, taxes, employer and employee contributions, and more. Contributions are taxed until they are withdrawn, rollovers are allowed, and both employers and employees make contributions to the plan.
Frequently Asked Questions
Who can set up a Keogh retirement plan? How much can I contribute to a Keogh plan?
Source: https://www.thebalancemoney.com/what-is-a-keogh-2894166
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