Introduction
A Keogh Plan, also known as an HR-10 plan, is a retirement savings vehicle established by the federal government in 1962 to give self-employed individuals and small business owners a way to save for retirement with tax advantages similar to those provided by employer-sponsored plans like 401(k)s. It is named after U.S. Congressman Eugene Keogh, who sponsored the legislation.
Eligibility
Keogh Plans are available to self-employed individuals such as sole proprietors, independent contractors, and unincorporated business owners, as well as small business owners who may have a few employees. If employees are covered, the employer must make equitable contributions on their behalf.
Types of Keogh Plans
There are two main types of Keogh Plans:
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Defined Contribution Keogh Plans: In this plan type, contributions are defined as a fixed percentage of annual earnings, up to a maximum IRS limit. The eventual retirement payout depends on the investment performance of the contributed funds.
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Defined Benefit Keogh Plans: This plan involves committing to a specific annual retirement benefit amount, with contributions calculated actuarially to meet that promised benefit.
Contribution Limits
For 2025, the maximum contribution limit for defined contribution Keogh Plans is the lesser of 25% of net self-employment earnings (after deducting self-employment tax and one-half of self-employment tax) or $66,000. Defined benefit plans have separate actuarial contribution limits.
Tax Advantages
Contributions to a Keogh Plan are made with pre-tax dollars, which lowers your taxable income for the year you make contributions. The funds grow tax-deferred until withdrawal during retirement, at which point distributions are taxed as ordinary income. Early withdrawals before age 59½ typically subject the account holder to a 10% IRS penalty in addition to income tax.
Comparison with Other Plans
Keogh Plans are often compared to SEP IRAs and Solo 401(k)s, which are also popular retirement options for the self-employed. While Keogh Plans offer high contribution limits and strong tax advantages, they tend to have more administrative complexity and costs. SEP IRAs and Solo 401(k)s often provide simpler setup and flexibility but may have different limits and features.
How to Set Up and Manage a Keogh Plan
Establishing a Keogh Plan requires adopting a formal written plan document and filing specific IRS forms, like Form 5300 for plan approval or Form 5500-EZ for annual reporting if applicable. Plan sponsors should consider consulting with a financial planner or tax professional familiar with self-employed retirement plans for proper setup and compliance.
Practical Example
Consider a freelance writer earning $70,000 in net income annually. The maximum Keogh Plan contribution would be roughly 25% of net earnings (after self-employment tax adjustment), which could be close to $15,000 a year. By contributing this amount pretax, the writer reduces taxable income, lowering current taxes owed, while the funds grow tax-deferred toward retirement.
Important IRS References and Forms
- For detailed IRS guidance, see IRS One-Participant 401(k) Plans.
- Form 5300 Application for Approval of Employee Benefit Plan.
- Form 5500-EZ Annual Return of One-Participant Plan, required in some cases.
Common Pitfalls
- Overlooking contribution limits can lead to IRS penalties.
- Not comparing with simpler alternatives like SEP IRA or Solo 401(k) could result in unnecessary costs.
- Failing to cover eligible employees equally when required.
Additional Resources
Learn more about SEP IRAs and Solo 401(k)s for alternative self-employed retirement savings options. Consider talking to a Financial Planner for personalized advice.
Conclusion
The Keogh Plan remains a valuable retirement savings option for self-employed individuals who want to maximize tax benefits and grow retirement funds aggressively. While setup and maintenance are more complex than some alternatives, the higher contribution limits may be worth it for those with substantial self-employment income.
External Authoritative Reference
For authoritative IRS information, visit the IRS Retirement Plans for Self-Employed Individuals page.
