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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When originally enacted in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.
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