Keogh Plan: Secrets Unlocked for You

3 minutes

Photo courtesy of wisegeek.com
Photo courtesy of wisegeek.com

What in the world is a Keogh Plan?

According to Investopedia. A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes.

A Keogh plan can be set up as a defined-benefit plan or defined-contribution plan, although most plans are set-up as a defined-contribution plan.

More on this later. The Keogh plan was initiated in 1962 and was the invention of a New York congressman named Eugene Keogh. Prior to 2001, they were very popular but due to changes in the tax system they were replaced by the SEP IRA, which has the same contribution limits and much less paperwork. Always a good thing.

So, how can this plan help me?

So who can set up a Keogh plan? Any self-employed individuals or any small business that is a sole proprietorship, partnership, or LLC.

This type of plan is a perfect choice for high-income earners.

Typically the Keogh is funded by the employer.

The Keogh comes in two kinds of flavors.

Defined contribution: these types of plans have two variations. Profit sharing and money purchase. The profit sharing version is most like a SEP, there is a ceiling on contributions. 25% of contributions or $53,000 in 2016. Below these limits you can contribute up to. With the money purchase plan, you can choose the percent you would like to contribute each year. And stick with it, if you don’t the IRS will become your best buddy. Not! Penalty for you.

Defined contribution plans account for more $6.7 trillion of the $24 trillion in retirement plan assets in the U.S. as of December 31, 2015. Guess which plan holds the most? You got it, the 401k. This plan holds more than 2/3 of all the retirement plan assets. That is a lot of money! But it is a drop in the bucket of what is needed.

Defined benefit: these type of Keogh acts like our old friend the Traditional. But for one key difference. You fund it yourself. You pick the annual pension you want and contribute (and deduct from taxes) whatever sum is needed to reach your goal. If you are self-employed and a high-income earner, say a doctor or lawyer. This kind of plan may permit you to save more than any other retirement plan.

The Keogh plan is treated just like our old friend the Traditional IRA. This means that your contributions will be tax-deferred. Which means a little more money in your pocket at the time of the contribution, but at the time of distribution, you will have a taxable event.

It also means that you will have the ability to make distributions at 59 1/2 without a penalty. And you will be required to make mandatory distributions when you reach 70.

There is an amazing chart that outlines this at Investopedia, check it out here. As a side note, if you have not checked out their website. Do it. It is awesome and they have all kinds of great content. A great learning center that has been very helpful to me in my education.

Another benefit would be that you investment choices are limitless. You are able to buy stocks, bonds, mutual funds, ETFs, annuities, and on and on. This is great because of all the flexibility that you would have.

A negative of the Keogh plan is that it has much more intensive administrative burdens and higher maintenance costs. Also with the tax laws changing it is a term that is not used as much.

This type of plan would definitely require the assistance of a financial advisor as well as a tax consultant. Being that it is much more involved it would be highly recommended to seek professional help.

Conclusion:

The Keogh plan is a great plan for high-income earner such as a doctor, lawyer, rock star. Anyone who is a self-employed and is in a higher tax bracket than the rest of the peasants would benefit from this plan.

It has potentially much higher contribution limits which can help you  set aside much more money for your retirement if you are a high-income earner.

One of the downsides to these plans is that they are much more labor intensive on the administrative side and are going to be far more costly than other plans.

Typically this plan is replaced with the SEP IRA which has much lower costs and is much easier to maintain.

Still, this could be the perfect vehicle for you to help set aside money for that retirement beach in Maui. Or to buy that island in the Caribean.

So that concludes our review of the Keogh plan. I hope that you learned something like I did.

If you found something of worth here please share it with your friends so they could learn more about retirement plans and help them on their way to that beach in Hawaii!

As always, thank you for taking the time to read this post and until time.

Take care.

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