Keogh Plan

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Keogh Plan

What is a Keogh plan?

A Keogh plan is a tax‑deferred, qualified retirement plan designed for self‑employed individuals and unincorporated businesses. Established by the Self‑Employed Individuals Tax Retirement Act of 1962, Keogh plans can be either defined‑contribution or defined‑benefit plans and generally allow higher contribution limits than IRAs and many other small‑business retirement plans.

Brief history

The name comes from Representative Eugene Keogh, who helped pass the 1962 law extending retirement plan options to the self‑employed. Subsequent legislation (notably EGTRRA in 2001) narrowed formal distinctions between plan sponsors, but the term “Keogh” is still used to describe qualified plans covering self‑employed individuals.

How Keogh plans work

Keogh plans function like other qualified retirement plans but are specifically for self‑employed people. Employers (including sole proprietors) make deductible contributions on behalf of eligible participants. Investments can include stocks, bonds, CDs, and annuities.

Key rules:
* Tax‑deferred growth until withdrawals.
* Withdrawals generally permitted beginning at age 59½.
* Required minimum distributions apply at specified ages (rules vary by birth year).

Types of Keogh plans

  1. Defined‑contribution Keogh plans
  2. Profit‑sharing plans: Employer may contribute discretionary amounts up to the annual dollar limit (see limits below). Contributions do not require the business to be profitable in a given year.

  3. Money‑purchase plans: Require a fixed percentage contribution each year as specified in the plan. Changing the fixed percentage can trigger penalties.

  4. Defined‑benefit Keogh plans

  5. Promise a specified retirement benefit, usually calculated from salary and years of service. Employer contributions are actuarially determined based on the promised benefit, participant age, and expected returns.

Contribution limits (examples from recent years)

Note: The IRS updates limits periodically.
* Profit‑sharing plans: up to $70,000 (2025 limit; $69,000 in 2024).
* Money‑purchase plans: up to 25% of compensation or $70,000 in 2025 (whichever is lower).
* Defined‑benefit plans: maximum annual benefit of $280,000 in 2025 (or 100% of compensation, whichever is lower).

Eligibility

Keogh plans are intended for self‑employed individuals and unincorporated businesses — for example, sole proprietors, independent contractors, and freelancers. Plan rules determine employee coverage and vesting.

Comparison with other retirement plans

  • IRAs: Keogh plans allow much higher contribution limits than traditional or Roth IRAs.
  • SEP IRAs and SIMPLE IRAs: These are simpler and cheaper to administer; Keoghs typically allow higher contributions but involve greater administrative complexity.
  • Solo (one‑participant) 401(k): A solo 401(k) is a 401(k) for business owners with no employees; Keogh plans can offer higher contribution potential in some circumstances but tend to involve more paperwork and compliance requirements.

Pros and cons

Pros:
* Higher contribution limits — attractive for high‑income self‑employed savers.
* Wide investment options similar to 401(k)s and IRAs.
* Contributions are generally tax‑deductible.

Cons:
* More administrative complexity and higher costs than SEP IRAs, SIMPLE IRAs, or solo 401(k)s.
* Plan design and maintenance (especially for defined‑benefit plans) can require actuarial services and strict compliance.

Bottom line

Keogh plans provide a way for self‑employed individuals and unincorporated business owners to save substantial amounts for retirement on a tax‑deferred basis. They are most useful for high‑income business owners who need higher contribution limits than other small‑business plans allow and who are willing to accept greater administrative burdens and costs.

Sources

Selected IRS guidance and federal legislation on retirement plans, including:
* IRS — Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
* IRS guidance on profit‑sharing plans and money‑purchase plans
* IRS updates to retirement plan limits (2024–2025 adjustments)
* H.R.1836 — Economic Growth and Tax Relief Reconciliation Act of 2001