As a finance expert, I often encounter self-employed individuals who struggle to find retirement plans tailored to their needs. The Keogh plan, though less discussed than 401(k)s or IRAs, remains a powerful tool for high-earning entrepreneurs, sole proprietors, and unincorporated businesses. In this guide, I dissect the Keogh plan’s mechanics, tax advantages, contribution limits, and suitability—helping you decide if it aligns with your retirement strategy.
Table of Contents
What Is a Keogh Retirement Plan?
A Keogh plan—named after the late Congressman Eugene Keogh—is a tax-deferred retirement account designed for self-employed individuals and small business owners. Established under the Employee Retirement Income Security Act (ERISA) of 1974, it allows substantial contributions, often exceeding those of standard IRAs or SEP-IRAs.
Types of Keogh Plans
Keogh plans come in two primary forms:
- Defined Contribution Plans
- Profit-sharing plans
- Money purchase plans
- Defined Benefit Plans
Each type has unique rules. I’ll explore them in detail.
Keogh Plan Contribution Limits
The IRS sets strict limits on contributions. For 2024, the rules are as follows:
Defined Contribution Keogh Plans
- Profit-sharing plans: Up to 25% of net self-employment income or $69,000 (whichever is lower).
- Money purchase plans: Fixed contributions (e.g., 10% of income annually), capped at 25% or $69,000.
Example Calculation:
If your net self-employment income is $200,000, the maximum profit-sharing contribution is:
Defined Benefit Keogh Plans
These plans target a specific retirement benefit, allowing contributions that actuarially fund the future payout. The 2024 limit is $275,000 per year or 100% of average compensation (whichever is lower).
| Plan Type | Max Contribution (2024) | Key Consideration |
|---|---|---|
| Profit-sharing Keogh | 25% of income or $69,000 | Flexible contributions |
| Money purchase Keogh | 25% of income or $69,000 | Mandatory contributions |
| Defined benefit Keogh | $275,000 or 100% of comp | Higher limits, actuarial complexity |
Tax Advantages of a Keogh Plan
Keogh plans offer two tax benefits:
- Tax-deferred growth: Contributions reduce taxable income.
- Tax-free compounding: Investments grow untaxed until withdrawal.
Example:
If you contribute $50,000 annually at an 8% return over 20 years, the future value is:
Without taxes eroding returns, Keogh plans outperform taxable accounts.
Keogh vs. Other Retirement Plans
Keogh vs. SEP-IRA
- SEP-IRA: Simpler, but lower contribution limits (25% of compensation or $69,000).
- Keogh: Higher administrative work but allows defined benefit options.
Keogh vs. Solo 401(k)
- Solo 401(k): Permits employee + employer contributions (total $69,000 in 2024).
- Keogh: Better for those needing contributions beyond 401(k) limits.
| Feature | Keogh Plan | SEP-IRA | Solo 401(k) |
|---|---|---|---|
| Max Contribution | Up to $275,000 | $69,000 | $69,000 |
| Admin Complexity | High | Low | Moderate |
| Loan Provisions | Allowed | Not allowed | Allowed |
Who Should Consider a Keogh Plan?
I recommend Keogh plans for:
- High-earning professionals (doctors, lawyers, consultants).
- Small business owners with steady, substantial income.
- Late savers needing aggressive catch-up contributions.
However, if your income fluctuates or you prefer simplicity, a SEP-IRA or Solo 401(k) may suffice.
How to Set Up a Keogh Plan
- Choose a plan type (defined contribution or defined benefit).
- Adopt a written plan (IRS Form 5305 or custom document).
- Open an account with a trustee (e.g., Fidelity, Vanguard).
- File Form 5500 annually if assets exceed $250,000.
Withdrawal Rules and Penalties
- Early withdrawals (before 59½): 10% penalty + income tax.
- Required Minimum Distributions (RMDs): Start at age 73 (under SECURE Act 2.0).
Final Thoughts
The Keogh plan is a robust but underutilized retirement vehicle. While its complexity deters some, the high contribution limits make it indispensable for self-employed individuals seeking to maximize tax-advantaged savings. Before committing, consult a financial advisor to weigh the costs against the benefits.
