What Is a Keogh Plot?
A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh design can be set up as either a defined-benefit or defined-contribution plan, although most plans are set as defined contribution. Contributions are generally tax-deductible up to a reliable percentage of annual income, with applicable absolute limits in U.S. dollar terms, which the Internal Revenue Armed forces (IRS) can change from year to year.
Key Takeaways
- Keogh plans are tax-deferred pension plans—either defined-benefit or defined-contribution—Euphemistic pre-owned for retirement purposes by either self-employed individuals or unincorporated businesses, while independent contractors cannot use a Keogh blueprint.
- Profit-sharing plans are one of the two types of Keogh plans that allow a business to contribute up to 100% of compensation, or $57,000 as of 2020.
- Keogh organizes have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) arranges, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners.
- Because advised tax retirement laws do not set apart incorporated and self-employed plan sponsors, the term “Keogh plan” is rarely ever inured to.
Understanding the Keogh Plan
Keogh plans are retirement plans for self-employed people and unincorporated businesses, such as solitary proprietorships and partnerships. If an individual is an independent contractor, they cannot set up and use a Keogh plan for retirement.
The IRS refers to Keogh procedures as qualified plans, and they come in two types: defined-benefit plans, which include profit-sharing plans and money acquisition plans, and defined-contribution plans, also known as HR(10) plans. Keogh plans can invest in the same set of securities as 401(k)s and IRAs, counting stocks, bonds, certificates of deposit (CDs), and annuities.
Types of Keogh Plans
Qualified Defined-Contribution Plans
Keogh designs can be set up as qualified defined-contribution plans, in which the contributions are made on a regular basis up to a limit. Profit-sharing plans are one of the two types of Keogh schemes that allow a business to contribute up to 100% of compensation, or $57,000 as of 2020 ($56,000 for 2019), according to the IRS. A business does not should prefer to to generate profits to set aside money for this type of plan.
Money purchase plans are less flexible compared to profit-sharing charts and require a business to contribute a fixed percentage of its income every year that is specified in plan documents. If a establishment alters its fixed percentage, it may face penalties. The contribution limit for 2020 for money purchase plans is set at 25% of annual compensation or $57,000 ($56,000 for 2019), whichever is debase.
Qualified Defined-Benefit Plans
Qualified defined-benefit plans state the annual benefits to be received at retirement, and these aids are typically based on salary and years of employment. Contributions towards defined-benefit Keogh plans are based on stated profits and other factors, such as age and expected returns on plan assets. For 2020, the
Advantages and Disadvantages of Keogh Plans
Keogh proposes were established through legislation by Congress in 1962 and were spearheaded by Rep. Eugene Keogh. As with other talented retirement accounts, funds can be accessed as early as age 59 1/2, and withdrawals must begin by age 72, or 70 ½ if you were 70 ½ in the future Jan. 1, 2020.
Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Allotment (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income problem owners. Because current tax retirement laws do not set apart incorporated and self-employed plan sponsors, the term “Keogh layout” is rarely ever used.