Keogh Plan - Explained
What is a Keogh Plan?
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Table of ContentsWhat is a Keogh Plan?How Does a Keogh Plan Work?Qualified Defined-Contribution Keogh PlansQualified Defined-Benefit Keogh Plans
What is a Keogh Plan?
Named after its creator, a Keogh plan is a retirement plan for self employed people including owners of small businesses like sole proprietorships and partnerships. Like any other saving plan, insurance Keogh plans are qualified by IRS (Internal Revenue Service). These plans are created as defined-contribution or defined-benefit and most of the plans are created as contribution plans. The contributions are tax deductible but they are also eligible for tax savings.
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How Does a Keogh Plan Work?
Keogh plans are retirement accounts available for self-employed individuals and those in unincorporated businesses. However, these plans are not available for freelancers. Since Keogh plans are qualified by IRS, they are categorized into two; defined benefit and defined contribution plans. Individuals contributing to Keogh plans are eligible to invest in stocks and bonds just like those contributing to 401k and IRA plans.
Qualified Defined-Contribution Keogh Plans
Individuals can contribute towards their retirement either through defined contribution or as profit-defined. In defined-contribution, an individual contributes a given amount of money at regular times up to a given limit while under defined-sharing plans, individuals contribute a given percentage of their business profits. The profit-defined plans, a business does not have to make a profit to make contributions.Under money sharing plans, a business is required to contribute a fixed percentage of its annual income failure to which the business is penalized. In 2017, the percentage was set at 25 percent of annual incomes or a minimum of $54,000.
Qualified Defined-Benefit Keogh Plans
Qualified defined-benefit plans shows the yearly benefits to be received on retirement. These benefits will be calculated from the salary and the length of employment. The defined benefits Keogh plans are determined by factors such stated benefits, age and returns from investment. The annual benefits of Keogh plans in 2018 were set at $220,000 or 100 percent of an employees compensation.Advantages and Disadvantages of Keogh PlansKeogh plans were initiated in 1962 by Rep. Eugene Keogh. The accounts are accessible at age 59.5 and withdrawals start by age 70.5. While Keogh retirement plans have high upkeep costs, their contribution is higher than other plans and this is why most people in high-income businesses prefer these plans. Because retirement laws do not set aside Keogh retirement plans, the term is not commonly used.