Last Updated on March 17, 2024 by Ben
The Keogh plan is a retirement plan that offers tax relief for small business owners who want to save for retirement. It is a very simple plan that consists of trust and a savings option for the business owner. Instead of contributing to an already confusing assortment of retirement accounts, they can contribute to a Keogh plan account which then goes into a trust account for later distribution when the owner retires.
What is a Keogh Plan?
The Keogh plan is a tax-saving vehicle that allows the company to contribute to an account on behalf of the owner. Up to 25% of the compensation paid to the business owner is contributed to the account tax-free by the company. If both owners are over the age of 50, they can each set aside up to an additional $6000 tax-free.
How Does Keogh Plan Work?
Keogh plans are very flexible and can be used in any situation where you are self-employed, the only stipulations being that your business must make under a certain amount per year and you cannot have employees. Self-employed individuals such as sole proprietors can use Keogh plans whether or not they hire employees, and the small business owner can also employ employees. It’s important to note that if your business employs anyone other than yourself, you cannot have a Keogh plan. The law states that the maximum annual amount of compensation on which contributions can be drawn for the Keogh account is $270,000. The limit, however, does not apply to owners over the age of 50. When owner-employees utilize a Keogh plan, the company they work for contributes a portion of their pay into the plan on their behalf. The plan is then held in a trust and only the amounts designated by the participants are invested. In some cases, 100 percent of an owner’s pay can go into his Keogh plan.
Types of Keogh Plans
Defined Contribution Plans
Defined benefit plans are also available for self-employed individuals and business owners with no employees other than themselves. With defined contribution plans, the contributions are directly made to an investment portfolio rather than a specific monthly payment as in the case of a defined benefit plan. Employers must contribute at least as much as the maximum set by the Internal Revenue Service. Defined contribution plans are similar to the retirement accounts that many private-sector employees accrue from their companies. The older you are, the more control you have over your retirement money and how it is handled. Keogh plans can be utilized by both small and large businesses alike.
Defined Benefit Plans
The most important distinction between defined benefit and defined contribution plans is the payout made to the owner. With a defined benefit plan, account balances are calculated based on annual contributions and interest earned as opposed to defined contribution plans where the payout is made up of contributions, earnings, and the appreciation in the account’s assets.
The annual payout is then given to the owner every year for the rest of their life. Defined benefit plans may also include a death benefit that pays out to your beneficiaries should you pass away.
Advantages and Disadvantages of Keogh Plans
Advantages of Keogh Plans
- Self-employment retirement plan available to business owners who have no employees
- Funds can be invested in almost any type of investment
Disadvantages of Keogh Plans
- More complex and require more management than profit-sharing plans, SIMPLE IRA,or SEP-IRA plans
- Contributions are based on self-employment income and must be made every year
Keogh Plan Rollover Rules & Limitations
Money that has been put into Keogh plans is not subject to tax until it is withdrawn. A rollover is a distribution or transfer of funds from one qualified retirement plan to another. Generally, the most money that can be rolled over to an IRA is limited to the number of contribution limits.
If you have participated in a Keogh plan, you may be able to roll your assets over into a traditional or Roth IRA. This can be accomplished by having the trustee of your Keogh plan send the assets to your bank or by requesting a check made out to you from the Keogh plan and depositing it into your checking account. You will then be able to submit paperwork to open an IRA with your bank or with a brokerage firm that holds IRAs.
Check with each institution to see what the requirements are and how much they charge for their services. If you choose the brokerage firm route, as soon as they receive the checks or wire instructions for the rollover, they can set up your IRA. Time is of the essence though because you have 60 days to deposit the money from your Keogh into an IRA. Also, some banks will only allow a 90-day window. Your Keogh plan should be able to provide you with a check that can be deposited into your bank account within 24 hours.
Keogh Plan vs. SEP vs. Solo 401k vs. Other Retirement Accounts
There are numerous types of retirement accounts out there and if you’re looking to start or contribute to one for your business the choice can be confusing. There are several different types of plans and each has its own set of advantages and disadvantages. Choosing which one is for you will ultimately depend on how much money you are contributing, whether or not you have any employees and what kind of investments you want your money to be in.
The most common employer-sponsored retirement accounts are SEP, SIMPLE, and Keogh. SEP-Simple Employee Pension Plan is the easiest to set up and has the lowest administrative expenses. A simplified employee pension (SEP) can be advantageous to businesses that are just getting started since there is no payroll deduction necessary. Just set a percentage of your income you want to contribute and the plan is set up.
There is a tax deduction for contributions you make into the plan and your investments grow tax-free as well. SIMPLE-Savings Incentive Match Plan for Employees can be set up by businesses that have traditional payroll deductions. The maximum amount that can be deducted from an employee’s paycheck is 12% of their wages and that amount is fixed and has to be taken out every pay period. SIMPLEs can include an additional 3% that the employer must contribute as well.
Keogh-A Keogh plan is a special kind of retirement account that businesses can set up for the benefit of their owner/employees. In general, these accounts can have higher contribution limits and more flexible withdrawal rules than other types of plans.
Most self-employed individuals will qualify for a Solo 401k plan. This type of retirement savings account combines some features of a Keogh and an Individual Retirement Account. The money that you put into your retirement plan is not taxed as income. Money in the account also grows tax-free while in the account, so when you take it out you will only have to pay income tax on the money taken out, not what it has grown to. This is a great way to amass wealth, especially for self-employed individuals who oftentimes do not have access to “regular” tax-advantaged retirement plans.
What Types of Gold Can You Invest In Via a Keogh Plan?
Many different types of gold coins and bars can meet the various needs of a Keogh Plan. The most common forms of gold bullion coins are the American Gold Eagle, the Canadian Gold Maple Leaf, and the Krugerrand. These coins come in various sizes from 1/20 oz up to 1 oz for the Eagles and Krugerrands and 1 oz, 1/2 oz, 1/4 oz, and 1/10 oz for the Maple Leaf.
The most common form of gold bullion bars is from the brand named “Good Delivery” bars produced by major banks like the Bank of England, the Federal Reserve, and other central banks around the world. These gold bars are .9999 fine and come in weights of 400 oz, 500 oz, and 100 oz bars.There are also privately minted bars that come in a variety of sizes and purities
Benefits of a Keogh to IRA Rollover
While the obvious benefit of the Keogh plan is that you can put a large amount of money into the plan, there are some other benefits as well.
- Your investment grows tax-free for however long you choose to have it sit in your account until you take it out and use it. This can come in handy if you need a large sum of money for a large ticket item or some kind of emergency in the future.
- You can access your money whenever you want, but it is NOT recommended that you do so. However, if you do decide to, you can take your money out penalty-free.
- The amount of money you can contribute to the plan increases steadily based on your age.
These are just some of the benefits that having a Keogh plan can provide for you and your family in the future. It is strongly advised that you have some kind of retirement savings plan and the Keogh is an excellent way to start one.
Who Can Have a Keogh?
To have a Keogh you must meet ALL of the following criteria:
- You must be self-employed.
- You must NOT be covered by any kind of company retirement plan.
- You must NOT be a 5% owner in the business (even if you are not drawing a “Salaried” wage).
- You do NOT have to pay self-employment tax on your Keogh contributions. Your self-employed compensation is used in the calculations for 75% of your Keogh contribution. The remaining 25% of the contribution comes from your after-tax compensation, so that money is 100% deductible from your taxable income.
- The company does NOT pay any part of your contribution or the administration fees; however, they can provide a “Gift” to you to help you fund your plan.
- You can contribute as much money per year into the account as you wish, up to the annual maximum set by the IRS every year.
The annual limit keeps going up, so make sure you check it before you start your new Keogh Plan account.
Summary
A Keogh Plan can be a great way to save for your retirement years, but it is only effective if you start it early enough. The best way to manage it is to talk with a financial advisor and let them guide you in the right direction.If you have a traditional IRA, you can also “convert” it to a Keogh and take advantage of the higher contribution limits. You can roll over a 401k from your previous job into a Keogh if your plan allows this option.