Keogh Plan

Keogh Plan Self-Employed Retirement Pension Plan Tax-Deferred Savings Corporate Pension Individual Retirement Account (IRA) Self-Employment Individuals Retirement Act
A US savings scheme designed to facilitate pension plans for self-employed individuals or employees of small, unincorporated businesses, with tax benefits deferred until withdrawals are made.
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Definition

A Keogh Plan is a tax-deferred pension plan available to self-employed individuals and employees of unincorporated businesses. Named after New York Representative Eugene James Keogh, who championed its creation, the plan allows these individuals to add to their retirement savings while enjoying tax benefits. Established by the Self-Employment Individuals Retirement Act of 1962, not 1982, as suggested, Keogh plans can coexist with other retirement accounts such as corporate pensions or Individual Retirement Accounts (IRAs).

Examples

Example 1: Self-Employed Consultant

A self-employed marketing consultant decides to open a Keogh plan to save for retirement. By contributing a percentage of their annual income to the Keogh plan, they reduce their taxable income for that year and allow the savings to grow tax-deferred until retirement.

Example 2: Small Business Owner

A small business owner with no incorporated business structure utilizes a Keogh plan for themselves and their employees. Contributions made benefit from tax deferral, helping both the employer and the employees enhance their retirement savings without immediate tax implications.

Frequently Asked Questions (FAQs)

What is the main advantage of a Keogh plan?

The main advantage is tax-deferred growth. Contributions to a Keogh plan reduce taxable income for the year and allow savings to grow without immediate tax obligations until funds are withdrawn, typically in retirement.

Who is eligible for a Keogh plan?

Keogh plans are available to self-employed individuals, owners of small businesses, and employees of unincorporated businesses. This includes sole proprietors and partnerships.

Can you have a Keogh plan and an IRA at the same time?

Yes, individuals can have both a Keogh plan and an IRA simultaneously, allowing additional opportunities for tax-deferred retirement savings.

How much can you contribute to a Keogh plan?

Contribution limits depend on the type of Keogh plan. For defined-contribution plans, the limit is generally 25% of income, up to $58,000 (as of 2021), while defined-benefit plans have different calculations based on actuarial determinations.

What are the types of Keogh plans?

There are two main types: profit-sharing plans and defined-benefit plans. Profit-sharing plans are more flexible with contributions, while defined-benefit plans promise a set retirement benefit based on earnings history and years of service.

  • Individual Retirement Account (IRA): A retirement savings account allowing individuals to contribute pre-tax or post-tax income, with tax deferral on growth until withdrawal.
  • Simplified Employee Pension Plan (SEP): A retirement savings plan for small businesses and self-employed individuals, offering similar tax-deferred growth with simplified contributions.
  • 401(k) Plan: A retirement savings plan sponsored by an employer, allowing employees to save and invest a portion of their paycheck before taxes are taken out.
  • Defined-Contribution Plan: A retirement plan where the employer, employee, or both make contributions regularly, with benefits based on the account balance at retirement.
  • Defined-Benefit Plan: A retirement plan that promises a specified monthly benefit upon retirement, based on salary and years of service.

References

Suggested Books for Further Studies

  • “Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches” by Everett Allen and Joseph Melene
  • “Tax-Free Retirement” by Patrick Kelly
  • “The New Retirement Savings Time Bomb” by Ed Slott

Accounting Basics: “Keogh Plan” Fundamentals Quiz

### Who typically qualifies for a Keogh plan? - [ ] Any US resident - [ ] Employees of large corporations - [x] Self-employed individuals and employees of unincorporated businesses - [ ] Government employees > **Explanation:** Keogh plans are specifically designed for self-employed individuals and employees of small, unincorporated businesses. ### What is a primary benefit of a Keogh plan? - [ ] Immediate tax deductions for property purchase - [ ] Unlimited contributions without tax implications - [ ] Loans without penalties - [x] Tax-deferred growth on contributions > **Explanation:** The key advantage of a Keogh plan is that contributions grow tax-deferred until withdrawals are made, typically in retirement. ### Can Keogh plans coexist with 401(k) and IRAs? - [ ] No, 401(k) plans are mutually exclusive - [ ] Only with 401(k) plans - [x] Yes, with both 401(k) plans and IRAs - [ ] Only if total contributions do not exceed $30,000 > **Explanation:** Individuals can maintain both Keogh plans and IRAs or 401(k) plans simultaneously, benefiting from multiple retirement savings accounts. ### What is the maximum contribution limit for a defined-contribution Keogh plan for 2021? - [x] $58,000 - [ ] $19,500 - [ ] $6,000 - [ ] $45,000 > **Explanation:** For defined-contribution Keogh plans, the maximum contribution limit for 2021 is $58,000. ### How is the contribution limit determined for defined-benefit Keogh plans? - [ ] A percentage of the previous year's income - [x] Based on actuarial calculations - [ ] Uniform for all participants - [ ] Flat contribution rate > **Explanation:** Defined-benefit Keogh plan contributions are calculated using actuarial assessments, ensuring promised benefits can be met. ### According to the IRS, which publication covers information on Keogh plans? - [ ] Publication 590 - [x] Publication 560 - [ ] Publication 502 - [ ] Publication 972 > **Explanation:** The IRS Publication 560 covers detailed information on Keogh plans and similar retirement accounts. ### What type of contribution flexibility is associated with profit-sharing Keogh plans? - [x] Annual contributions are flexible - [ ] Contributions must be equal each year - [ ] Contributions are mandated by the IRS each quarter - [ ] Contributions only made in employee match scenarios > **Explanation:** Profit-sharing Keogh plans offer flexibility in annual contributions depending on profits and the business owner's discretion. ### What act established Keogh plans? - [ ] The Tax Reform Act of 1986 - [x] The Self-Employment Individuals Retirement Act of 1962 - [ ] The Employee Retirement Income Security Act (ERISA) - [ ] The Revenue Act of 1978 > **Explanation:** The Self-Employment Individuals Retirement Act of 1962 established Keogh plans to aid retirement savings for self-employed individuals. ### Who may benefit from establishing a Keogh plan? - [ ] Employees of multi-national corporations - [ ] Freelance artists - [ ] Government contractors exclusively - [x] Small business owners with unincorporated businesses > **Explanation:** Small business owners with unincorporated businesses and their employees stand to benefit significantly from Keogh plans. ### What distinguishes a Keogh plan from a traditional 401(k)? - [ ] Keogh plans are only for freelance employees - [x] Keogh plans are specifically for self-employed individuals, whereas 401(k) plans are usually employer-sponsored for corporation employees - [ ] Keogh plans do not offer any tax benefits - [ ] 401(k) plans have lower contribution limits compared to Keogh > **Explanation:** Keogh plans are aimed at self-employed individuals and small businesses, while 401(k) plans are predominantly employer-sponsored plans designed for corporate employees.

Thank you for diving into the world of retirement planning with Keogh plans and challenging yourself with our comprehensive quiz. Keep enhancing your financial literacy for a secure retirement future!

Tuesday, August 6, 2024
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