Keogh Plans

Keogh or H.R. 10 plans are qualified retirement plans for self-employed individuals. A Keogh plan can take the form of a defined contribution plan, like a profit-sharing plan or money purchase plan, or a defined benefit plan.

When originally enacted in 1963, Keogh plans were rather limited, but they provided the only option for a self-employed individual to save for retirement . Over the years, the tax laws have changed to eliminate the distinctions between corporate and Keogh plans. In addition, other plans for the self-employed have developed, like Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs).

Setting up a Keogh plan is fairly easy. The employer (including self-employed individuals) can adopt a generic master or prototype plan already approved by the IRS. The IRS-approved plans can be provided by banks, trade or professional organizations, insurance companies, and mutual funds. If you are a regular employee working for an employer with a Keogh plan, you simply have to contribute to the extent allowed under the plan.

Contributions. The maximum amount you can contribute to a Keogh depends on whether it is a defined contribution or a defined benefit plan. For 2009, the annual benefit for a defined benefit plan participant cannot exceed the lesser of 100 percent of the participant's average compensation for his or her highest three consecutive years or $245,000. If it is a defined contribution plan, annual contributions and other additions in 2009 (except for earnings) to an account cannot exceed 25% percent of the compensation actually paid to the participant or $49,000 for 2009.