A Keogh plan is a tax-deferred retirement savings program available to self-employed individuals and unincorporated small businesses in the United States. Contributions are deducted from taxable income, and investment growth is tax-deferred until withdrawal, typically in retirement. The plan was created by the Self-Employment Contributions Act of 1962 and was the first retirement vehicle specifically designed for sole proprietors, partners, and independent contractors.
Key Takeaways
- A Keogh plan is a qualified retirement plan for self-employed individuals and unincorporated businesses.
- Contributions are tax-deductible, and growth is tax-deferred until withdrawal.
- Contribution limits are higher than for IRAs - up to 69,000 dollars in 2024 for defined contribution plans.
- Keogh plans come in two flavors: defined contribution (DC) and defined benefit (DB).
- Since 2001, Keogh is largely a legacy term - these plans are now technically qualified plans and are used by higher-earning self-employed individuals.
What is a Keogh Plan?
A Keogh plan is a qualified retirement plan that is specifically designed for self-employed people. To open one, you must have net earnings from self-employment, not just W-2 wages from an employer. Sole proprietors, partners in partnerships, members of LLCs taxed as partnerships, and freelancers with Schedule C income are all eligible.
The name Keogh comes from Representative Eugene Keogh, who sponsored the original legislation. The Tax Equity and Fiscal Responsibility Act of 1982 and later the Economic Growth and Tax Relief Reconciliation Act of 2001 made significant changes. Since EGTRRA, the contribution limits for self-employed individuals match those of corporate qualified plans.
How Does a Keogh Plan Work?
Contributions are based on net self-employment income, not gross revenue. For a defined contribution Keogh, the limit in 2024 is the lesser of 25 percent of compensation, or 69,000 dollars. Compensation for a self-employed person is calculated as net earnings from self-employment minus the deduction for one-half of self-employment tax and minus the contribution itself, which makes the math recursive.
A defined benefit Keogh works like a traditional pension: the contribution is whatever is needed to fund a target annual benefit at retirement, up to 275,000 dollars per year in 2024. This can allow very high contributions, sometimes over 200,000 dollars for a 60-year-old, with a corresponding deduction. DB Keoghs require an enrolled actuary to certify the contribution amount annually.
Money inside the plan grows tax-deferred. Withdrawals before age 59 and a half generally face a 10 percent penalty plus income tax. Required Minimum Distributions must begin by April 1 of the year after the owner turns 73. Keoghs can also be set up as Solo 401(k)s, which combine profit-sharing and elective deferrals in one plan.
Why Does a Keogh Plan Matter?
A Keogh plan matters because it lets self-employed people save much more for retirement than a standard IRA. In 2024, the IRA contribution limit is 7,000 dollars (8,000 if 50 or older). A self-employed consultant earning 200,000 dollars in net income could contribute 50,000 dollars or more to a Keogh, versus 7,000 dollars to an IRA.
The upfront tax deduction is also powerful. A 50,000 dollar contribution at a 32 percent marginal federal tax rate saves 16,000 dollars in federal tax in the year of contribution, plus state tax savings. The money is then taxed only at withdrawal, often at a lower rate, because retirees typically have less income.
Keoghs also serve as a catch-up tool for late starters. A 55-year-old self-employed individual who has saved little can shelter a large portion of current income to close the gap before retirement.
What Are the Limitations of a Keogh Plan?
- Administrative complexity - Keoghs require a written plan document, annual IRS filings (Form 5500 or 5500-EZ), and for DB Keoghs, an enrolled actuary.
- Locked money - funds in a Keogh are retirement money. Early withdrawals before age 59 and a half face a 10 percent penalty on top of income tax.
- Not great for side incomes - if self-employment is a small side gig, a SEP-IRA or Solo 401(k) is typically simpler and cheaper.
- Annual contribution variability - because contributions depend on net income, a bad year means a smaller contribution.
- RMDs - owners are not exempt from required distributions in retirement, which can push a retiree into a higher tax bracket.
Frequently Asked Questions
What is the difference between a Keogh and a SEP-IRA?
A SEP-IRA is simpler but caps employer contributions at 25 percent of compensation, the same as a defined contribution Keogh. However, a Keogh can also be set up as a defined benefit plan, allowing much larger contributions. Keoghs also offer loan provisions and Roth-style treatment in Solo 401(k) form.
Can I have a Keogh plan while also working as an employee?
Yes. If you have self-employment income in addition to W-2 wages, you can contribute to both an employer 401(k) and a Keogh, but contribution limits are aggregated across all defined contribution plans.
Can I contribute to a Keogh if my business had a loss?
No. Contributions are based on net self-employment income. A loss year means no eligible income, so no contribution. However, you can make a contribution for a prior year up to the tax filing deadline.
This article is for educational purposes only and does not constitute financial advice.
