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When originally enacted in 1963, Keogh plans were rather limited, but they provided the only option for a self-employed individual to save for retirement .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 2005, 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 $170,000 ($175,000 in 2006). If it is a defined contribution plan, annual contributions and other additions in 2005 (except for earnings) to an account cannot exceed the lesser of 100 percent of the compensation actually paid to the participant or $42,000 ($44,000 in 2006). For contribution limits beyond 2006 see your tax profesional.