Who is the Keogh plan for?
Keogh plans are tax-deferred retirement plans for individuals who are self-employed, such as sole proprietors, partners in a business, or practitioners like journalists, lawyers and doctors.
Keogh plans are a good solution for those who are otherwise not eligible to participate in any other kind of qualified corporate retirement programs, such as 401k or 403b.
Keogh Plan Options
Although Keoghs can be established as defined-benefit plans, most participants choose the defined-contribution option.
- With defined-benefit Keoghs, participants receive a fixed, predetermined benefit which is calculated using actuarial formulas on the basis of the participant's years of service and annual income. Because the length of service counts in estimating the Keogh benefit, defined-benefit plans are popular with senior employees.
- Defined-contribution Keogh plans - also called individual account plans - determines the exact contribution amounts that need to be put in the participant's account. The actual retirement benefit will depend on the accumulated funds and the investment performance of the Keogh account.
High-income earners typically opt for money-purchase or profit-sharing Keogh plans which provide flexibility as it is based on annual earnings.
Keogh Contributions
Keogh account contributions are made on a tax-deferred basis and funds are accumulated free of income tax until they are distributed. Keogh plans are very popular because they offer comparatively higher contribution limits.
In order for the Keogh plan contributions to be tax-deductible, the following requirements must be satisfied:
- The tax-deductible portion of Keogh defined-contribution plan contributions is limited to quarter of the participant's annual income or $49,000, whichever is lower (for tax year 2009);
- For defined-benefit Keogh plans the contributions are actuarially determined to be invested in the account towards the desired benefit which cannot exceed $180,000 per annum.
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