A Keogh Plan is a tax-deferred retirement savings plan for self-employed individuals and unincorporated businesses, allowing higher contribution limits compared to traditional IRAs.
A Keogh Plan, also known as an HR-10 plan, is a retirement savings vehicle designed specifically for self-employed individuals or small business owners operating unincorporated businesses. It allows eligible participants to make tax-deductible contributions, which grow tax-deferred until withdrawal. Contributions can be based on a percentage of income, and the plan supports both defined contribution and defined benefit structures. Keogh Plans are subject to annual contribution limits and require adherence to specific IRS rules regarding plan administration and distributions. In the finance and wealth management context, Keogh Plans provide a method for affluent self-employed clients to save aggressively for retirement while optimizing tax advantages. They are important for comprehensive retirement and tax planning strategies, promoting discipline in saving and investment over long time horizons. Compared to other retirement accounts, Keogh Plans can offer greater contribution flexibility but also involve more complex compliance requirements.
Keogh Plans impact investment strategy by enabling high-net-worth self-employed clients to channel more funds into retirement savings with tax-deferral benefits, effectively increasing capital available for long-term growth. This has direct implications for portfolio construction, liquidity planning, and risk management, since distributions are typically restricted until retirement age. From a reporting perspective, meticulous record-keeping and compliance with IRS regulations are essential to maintain plan qualifications and avoid penalties. In tax planning, Keogh Plans provide critical advantages by reducing current taxable income and deferring taxes until funds are withdrawn, which can be beneficial in managing multi-generational wealth and income smoothing. Governance of these plans requires proper oversight to ensure alignment with family office objectives, adherence to contribution limits, timely distributions, and consideration of beneficiary designations. Understanding Keogh Plans helps advisors integrate tailored retirement solutions into a holistic wealth plan for self-employed stakeholders.
Consider a self-employed consultant earning $150,000 annually. Under a Keogh Plan, they can contribute up to 25% of their compensation, which amounts to $37,500 for the year, on a tax-deferred basis. This contribution reduces their taxable income from $150,000 to $112,500, lowering current income tax liability while growing investments for retirement. In contrast, the maximum contribution to a traditional IRA is significantly lower, illustrating the benefit of the Keogh Plan for high earners.
Keogh Plan vs. 401(k)
While both Keogh Plans and 401(k) plans are tax-advantaged retirement accounts, Keogh Plans are designed primarily for self-employed individuals and unincorporated businesses with potentially higher contribution limits based on income. In contrast, 401(k) plans are commonly sponsored by corporations and can include matching contributions from employers. Keogh Plans also involve distinct compliance and administrative requirements compared to 401(k)s.
Who is eligible to open a Keogh Plan?
Eligibility for a Keogh Plan is limited to self-employed individuals or owners of unincorporated businesses without full-time employees other than the owner and possibly their spouse. Corporations and partnerships may also establish Keogh Plans for their self-employed partners.
What are the contribution limits for a Keogh Plan?
Contribution limits for Keogh Plans are generally up to 25% of earned income or a defined dollar maximum set by the IRS annually. The exact limit depends on the type of Keogh Plan (defined contribution vs. defined benefit) and IRS rules for that year.
How are distributions from a Keogh Plan taxed?
Distributions from a Keogh Plan are taxed as ordinary income in the year withdrawn. Early withdrawals before age 59½ may also be subject to additional penalties unless qualifying exceptions apply.
