Self-Employment Individuals Retirement Act (Keogh Plan)

The Self-Employment Individuals Retirement Act, commonly known as the Keogh Plan, is a retirement plan designed for self-employed individuals and small business owners, allowing them to save for retirement with tax-deferred contributions.
On this page

Definition

The Self-Employment Individuals Retirement Act, better known as the Keogh Plan, is a tax-advantaged, retirement savings plan designed primarily for small business owners and self-employed individuals. Named after U.S. Representative Eugene Keogh, who sponsored the legislation, Keogh Plans allow eligible individuals to set aside a portion of their income for retirement. Contributions to a Keogh Plan are tax-deductible up to certain limits, providing both immediate tax relief and long-term savings growth benefits.

Examples

  1. Sole Proprietor Contribution: A sole proprietor of a small consultancy firm opens a Keogh Plan and decides to contribute a portion of their annual income. If their earnings are $100,000, they might contribute $20,000 to the plan, which is tax-deductible, reducing their taxable income for that year.

  2. Partnership Contribution: A partnership consisting of two doctors decides to set up a Keogh Plan. Each partner’s earnings are considered separately, and each can contribute $15,000 of their $120,000 annual income to their respective Keogh Plans, thus achieving tax-deferred growth.

Frequently Asked Questions (FAQs)

1. What are the types of Keogh Plans available?

  • There are two main types of Keogh Plans: Defined Benefit Plans and Defined Contribution Plans. Defined Contribution Plans can be further categorized into Money Purchase Plans and Profit-Sharing Plans.

2. Who is eligible to set up a Keogh Plan?

  • Self-employed individuals such as sole proprietors, partnerships, and unincorporated businesses are eligible to establish a Keogh Plan.

3. What are the contribution limits for a Keogh Plan?

  • Contribution limits for Keogh Plans vary with the type of plan chosen. For Defined Contribution Plans, individuals can contribute up to 25% of their compensation or $58,000 (for 2021), whichever is less.

4. Can employees participate in a Keogh Plan?

  • Yes, if the self-employed individual has employees, they must include eligible employees in the plan, making contributions for them as well.

5. What are the tax advantages of a Keogh Plan?

  • Contributions made to a Keogh Plan are tax-deductible, reducing taxable income for the year they are made. The funds in the plan grow tax-deferred until withdrawn.
  • IRA (Individual Retirement Account): A retirement savings account with tax advantages, available to individuals with earned income.
  • 401(k) Plan: A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out.
  • SEP (Simplified Employee Pension) IRA: A retirement plan that an employer or a self-employed individual can establish, with contributions made directly to an individual retirement account (IRA) set up for each employee.
  • Defined Benefit Plan: A retirement plan that guarantees a specified benefit upon retirement, often based on salary and years of service.

Online References

Suggested Books for Further Studies

  • “The New Retirement Savings Time Bomb” by Ed Slott
  • “Retirement Planning Guidebook” by William J. Bernstein
  • “ESOPs and Retirees: Benefits of Employee Ownership Plans” by Scott Barnes

Accounting Basics: “Keogh Plan” Fundamentals Quiz

Loading quiz…

Thank you for exploring the intricate details of Keogh Plans through our comprehensive guide and challenging quiz questions. Empower your retirement planning with extensive knowledge!

Self-Employment Retirement Plan
Self-Employment Income