Keogh Plan: Contribution Limits, Rules & Deadlines

Keoghs are retirement savings plans designed to allow people who don’t have much money start saving for their retirement. A Keogh plan is a defined contribution plan, meaning that the amount you contribute and how it grows depends on your own contributions as well as investment returns earned by the funds invested in this account. These accounts are typically funded with personal assets like stocks, bonds or cash and can be operated either through an employer-sponsored plan or on your own without one.,

In order to maintain a sustainable take home pay and avoid the possibility of your investment funds being depleted, you may decide to put in place contribution restrictions. These can include specific dates when you will stop investing and how much money is allowed per month or year. Putting these requirements into place is a wonderful way to ensure that your retirement savings are not depleted before it’s time for them too!

Keogh plans are retirement savings plans that allow for contributions to be made, and the money to be withdrawn later. The Keogh Plan has contribution limits, rules & deadlines.

A Keogh plan is a qualified retirement plan that enables self-employed persons to make tax-deductible contributions of up to $56,000 each year. Because tax regulations now enable company owners who used to utilize Keogh plans to choose other plans instead, alternatives such as SEP IRAs and Solo 401(k)s have essentially supplanted them.

What Is a Keogh Strategy?

Keogh plans were created for those who manage unincorporated firms as self-employed retirement plans. Self-employment income is required to establish a Keogh plan—W-2 workers must have revenue from independent business operations to qualify. Since the tax law no longer differentiates between sole proprietorships and other businesses, Keogh plans have been largely superseded by other options.

To set up a Keogh plan, you’ll need to engage with a company that specializes in them. The majority of self-employed people who utilize Keogh plans have their accounts set up and administered by independent administrators. This is due to the fact that operating a Keogh plan is more difficult than maintaining other kinds of plans, and it requires the submission of an annual Form 5500. This may increase the time it takes to administer a Keogh as well as the expense in comparison to other plans.

Keogh plans may be organized as defined benefit plans (similar to pensions) or defined contribution plans (similar to 401(k)s) (like an IRA). Defined benefit plans use actuaries to advise members on how much to contribute in order to reach a certain retirement income. Participants in defined contribution plans may pick their contribution amount, but the value of their account at retirement will fluctuate.

Benefits that are clearly defined Participants in Keogh plans may contribute a higher percentage of their income than in defined contribution plans. Contribution limitations for Keogh plans are $56,000, but they vary depending on how the plan is set up. There are usually superior Keogh plan options available, regardless of whether they are organized as defined benefit or defined contribution plans.

If you wish to contribute up to $56,000 to a qualified retirement plan, a SEP IRA or Solo 401(k) may be a better option than a Keogh plan since they are much simpler to manage. In the SEP IRA vs. Keogh section below, you may learn more about how SEPs differ from Keoghs.

Benefits of the Keogh Plan

A Keogh plan is a self-employed retirement plan that enables individuals and small company owners to make tax-deferred contributions of up to $56,000 each year. Their account will grow tax-free until they reach the age of 5912. Many IRAs cap contributions at 25% of income, however if created as defined benefit plans, Keogh contribution limitations may be greater.

Previously, tax law treated incorporated and unincorporated retirement plan sponsors differently, resulting in situations when Keogh plans were clearly superior to alternatives. Because of the changes in the legislation, Keogh plans are seldom the best solution for a self-employed person or a small company owner. Other retirement benefit accounts may usually provide the same advantages with less administrative problems.

“Keogh plans were formerly characterized as a sort of profit-sharing plan for unincorporated enterprises, with certain characteristics, such as contribution limitations, that were somewhat different (usually lower) than their corporate counterparts. The only significant change today is that the company owner’s earned income, which is used to compute the profit-sharing payment, may need to be modified to account for the amount of the contribution made on his behalf.”

— Neponset Valley Financial Partners President Clifford L. Caplan, CFP, AIF

When Should You Use a Keogh Plan?

When unincorporated retirement plan sponsors were considered differently from corporate plan sponsors, Keogh plans were significantly more common. Keoghs, on the other hand, are only useful in limited instances because the legislation has altered. In terms of cash restrictions, Keoghs has among of the highest—$56,000—but they also need an annual Form 5500 filing.

A Keogh plan may be advantageous in the following situations:

• Individuals earning more than $150,000 per year who are self-employed — Keogh plans need self-employment income and have high contribution limitations (individuals earning more than $150,000 per year).
• Owners of small businesses who wish to retire — Although most IRAs are only accessible as defined contribution plans, Keoghs may be set up as defined benefit plans, similar to a pension.
• Individuals who make a living as a self-employed person and have no alternative retirement plan – If you’re self-employed and don’t have another retirement plan, you may contribute up to 100% of your earnings—more than IRAs—up to $56,000 in a Keogh.

If you work for a firm that offers a Keogh, you may be able to combine this plan with another option, such as a Traditional IRA. This is useful if you conduct freelance work on the side and wish to contribute to a retirement plan that isn’t offered by your company. See how a Traditional IRA differs from a Keogh IRA in the section below.

One of the most common Keogh options for self-employed persons is an Individual or Solo 401(k). A Solo 401(k) may provide you with the same high contribution limits as a Keogh without the administrative expenditures if you don’t have staff. Check out the Solo 401 vs. Keogh (k) section below to understand how a Solo 401(k) differs from a Keogh.

Costs of the Keogh Plan

Costs of the Keogh Plan are one of the biggest drawbacks of these plans. Contribution limits for Keogh plans are the same as SEP IRAs and 401(k)s, but the costs of a Keogh can be much higher. This is because Keogh plans require much more administration, even though they have the same investment options.

Some Costs of the Keogh Plan include:

• Setup fees for Keogh plans range from $500 to $5,000. A plan paper must be written and adopted. If you use a defined benefit plan, you will have to pay actuarial costs.
• Annual actuarial and administrative fees range between $250 and $3,000 per year. Form 5500 must be completed. If you have a defined benefit plan, an annual actuarial evaluation may be required.
• Trading commissions range from $5 to $50 each transaction. Stocks, bonds, options, and other individual securities may be traded in the account.
• Commissions on new donations to mutual funds: up to 5% Depending on the source, commissions may or may not be free, but they may be as high as a few percent.
• Context: Fund cost ratios range from 0.03 percent to 2.00 percent yearly.

Many small company retirement programs are simpler to manage and less expensive than a Keogh plan.

Rules of the Keogh Plan

Many Rules of the Keogh Plan are the same as IRAs. However, Keogh plans also have additional rules that make them more restrictive and more expensive to administer. For example, Keogh plans must be set up before the end of the year they plan to contribute. Business owners also have to file an annual Form 5500.

Some Rules of the Keogh Plan issued by the IRS include:

• To start up, you must be self-employed. Because you must have self-employment income to be eligible, a Keogh is a self-employment retirement plan. If you also have self-employment income, having another plan at work does not rule you out.
• A defined contribution or defined benefit plan may be used – You get to select which to use when you set up a Keogh, although charges may vary. Defined benefit plans allow for larger contribution limits as a percentage of income, but also come with actuarial fees.
• If you set up a Keogh plan for your small business, you must make the plan accessible to any employee who is 21 years old or older and works for your company for at least 1,000 hours each year.
• You can’t set up a Keogh plan between the end of the year and your tax-filing deadline, unlike an IRA. The strategy must be created during the year in which it will be used.
• No withdrawals before the age of 5912 — Just like an IRA, Keogh plans do not allow withdrawals before the age of 5912.
• Necessary minimum distributions at age 7012 – If you have a balance in your Keogh account when you reach 7012, you must begin taking required distributions.
• Taxes on distributions — Just like an IRA, Keogh plan withdrawals are subject to income tax.
• Unlike IRAs, company owners with Keogh plans are required to submit Form 5500 yearly with the IRS to provide information about their plan.

Contribution Limits in the Keogh Plan

Self-employed people may contribute up to $56,000 to a Keogh plan by contributing 25% of their pre-tax income. You may contribute up to 100% of your pre-tax income, up to $56,000, in tax-deferred contributions if the Keogh is a defined benefit plan or if you’re self-employed and the Keogh is your sole retirement plan.

Contribution Limits in the Keogh Plan are:

• Defined contribution schemes, either alone or in combination with other retirement plans: 25% of your pre-tax earnings, up to $56,000
• Your sole retirement plan or a defined benefit plan: Up to $56,000 in pre-tax income is tax-free.

Because it may be organized as a defined contribution or defined benefit plan, a Keogh is a unique self-employment retirement plan (like a pension). Contributions to a Keogh plan vary based on how your plan is set up. You may only contribute up to $56,000 each year, regardless of whether your plan is a defined contribution or defined benefit plan.

Deadlines for the Keogh Plan

Deadlines for Keogh plans are similar to IRAs but more restrictive when you set up your plan. According to Rules of the Keogh Plan, you have to establish your plan before the end of the year of the plan’s effective year. Once your plan is established, deadlines for contributions are the same as IRA alternatives.

Deadlines for the Keogh Plan to be aware of include:

• Setup deadline: Keoghs must be formed before the plan takes effect at the end of the year.
• Contribution deadline: Just with a SEP IRA, contributions to a Keogh plan must be made before the tax-filing deadline for the contribution year.

Taxes under the Keogh Plan

The tax requirements for Keogh plans are the same as those for IRAs and other qualified retirement accounts. Contributions to a Keogh are tax-deductible. Your Keogh account grows tax-free after you start contributing, but qualifying Keogh disbursements are taxed as income. Whether your plan is a defined contribution or a defined benefit, Keoghs have the same tax treatment.

Any Keogh plan distributions obtained before age 5912 are subject to a 10% early distribution penalty in addition to income taxes on withdrawals. Early withdrawals from 401(k) and IRA alternatives are subject to the same penalty.

SEP IRA vs. Keogh

Keogh plans have mostly been supplanted by alternatives, such as SEP IRAs, since various modifications to the tax law were implemented in the early 2000s. SEP IRAs, unlike Keogh plans, may only be set up as defined contribution plans. SEP IRAs, on the other hand, have the same contribution limitations as Keogh plans.

One of the most popular self-employment retirement plans is the SEP IRA. The most significant disadvantage of a SEP is that companies that set up a SEP must finance contributions to employee accounts whenever they make contributions to their own accounts. Visit our complete guide to SEP IRAs for additional information on how they function.

If you’re considering about starting a Keogh, you should check at SEP IRA choices first. This will assist you in determining comparable investment possibilities, administrative needs, and plan expenses.

Solo 401 vs. Keogh (k)

Another excellent self-employment retirement plan is a Solo 401(k), which is designed for enterprises with no workers except from the owner. Solo 401(k)s are organized similarly to other 401(k) plans, except they need less management. A Solo 401(k) may, however, be readily extended to accommodate other members if you ever recruit staff.

Solo 401(k)s provide the same high contribution limits as Keogh plans while being considerably simpler to manage. Solo 401(k)s, like SEP IRAs, are limited to defined contribution plans, but they are much more versatile and cost-effective than Keogh plans.

Another approach to evaluate a Keogh vs. Solo 401(k) is to look at the investment possibilities and expenses of multiple Solo 401(k) providers. You may also evaluate how a Solo 401(k) compares to a Keogh in terms of administration. For additional information, see our list of the Best Solo 401(k) Providers.

If you’re considering a Solo 401(k) instead of a Keogh, we suggest ShareBuilder 401k. ShareBuilder 401k provides low-cost 401(k) plans, including single-member programs. Check out ShareBuilder 401k to learn how they can assist you with your Solo 401(k) plan (k).

ShareBuilder 401k is a great place to start.

SIMPLE IRA vs. Keogh

A SIMPLE IRA might be a terrific option to a Keogh plan if you’re a small company owner looking to encourage employee contributions. SIMPLE IRAs are sometimes referred to as the “poor man’s 401(k)” since they are extremely comparable to 401(k) plans but without the administrative expenditures.

Participants may contribute up to $25,000 to a SIMPLE IRA via salary deferrals and employer matching contributions. The requirement that companies match employee contributions up to 3% of employee pay is a major disadvantage of a SIMPLE IRA for employers.

By studying how to set up a SIMPLE, you may obtain a solid picture of how SIMPLE IRAs vary from Keoghs. SIMPLE IRAs are similar to Keogh IRAs in that they require employers to match employee deferrals, but they are more simpler to set up and maintain.

Traditional IRA vs. Keogh IRA

A Traditional IRA, unlike a Keogh plan, is the most straightforward and cost-effective retirement account accessible. Traditional IRAs are not employer-sponsored plans; instead, each person must set one up on their own. Each participant in a Traditional IRA may select when and how much to contribute.

The annual contribution maximum for traditional IRAs is $5,500. Account holders over the age of 50 are also eligible for a $1,000 catch-up contribution. Traditional IRA contributions are substantially smaller than Keogh contributions, but these plans are very flexible and cost next to nothing to start up and run.

If you currently have a Keogh account and wish to reduce your administrative burden, you may convert it to an IRA. This will provide you with the same freedom as IRA accounts without the need to submit a Form 5500 or continue to manage your Keogh account.

Frequently Asked Questions about the Keogh Plan (FAQs)

If you still have questions about What Is a Keogh Strategy? or how it works, here are some of our frequently asked questions.

Who is eligible for the Keogh Plan?

You must have self-employment income to set up a Keogh plan. If you’re self-employed, though, you must enable qualified workers to join as well. Employees who are at least 21 years old and work at least 1,000 hours per year for your company are considered eligible.

What is the difference between a Keogh Plan and a Qualified Plan?

Because these accounts get preferential tax treatment, a Keogh plan is called a qualified plan. Contributions to a Keogh are tax deductible, and the account grows tax-free until dividends are taken. When you take money out of a Keogh, the withdrawals are considered taxable income.

Is it possible to have a Keogh Plan and an IRA?

You may be able to contribute to both a Keogh plan and an IRA in certain instances. If you’re qualified for a Keogh plan, though, you could be limited in how much you can put into an IRA. Contributions to a Keogh may reduce your IRA contribution deductibility or render you unable to contribute to an IRA altogether.

Conclusion

A Keogh plan is a self-employment retirement plan designed specifically for self-employed people and unincorporated company owners. You may make up to $56,000 in tax-deferred contributions each year with a Keogh. However, due to recent changes in the tax rules, Keoghs have mostly been supplanted with IRA counterparts.

Keogh plans are a type of retirement account that allow individuals to set up and contribute into a retirement account. The Keogh plan eligibility is the amount that can be contributed into the plan. Reference: keogh plan eligibility.

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