Ah, poor, misunderstood and neglected Keogh (KEE-og) Plan. You don’t get the press that your fancy relatives 401(k), IRA and Roth, or even SIMPLE achieve… it seems as if the investment discussion world is completely abandoning you.
First brought into existence in 1962 (yes, it’s a post-boomer like me!) the Keogh or HR10 plan is essentially a vehicle for the self-employed to establish pension plans just like the big companies. A Keogh plan can be either a defined benefit (traditional pension) or a defined contribution (such as a 401(k)) plan.
The Keogh plan has the same attributes as most other qualified plans, including the age 59½ limit for qualified withdrawals, as well as the age 70½ required minimum distribution rules. Depending upon the type of plan established, most common investments can be made in a Keogh plan.
The real benefit of a Keogh plan over a SIMPLE or other types of plans is in the higher limit for contributions. In the Keogh plan, up to $49,000 (for 2009) can be contributed and deducted, limited to 25% of the compensation of the employee.
Recent implementation of the so-called “solo 401(k)” has lessened the need for the Keogh plans in the defined contribution arena, but for establishment of a defined benefit pension plan or a money purchase pension plan, the Keogh remains a very important piece of the puzzle for sole proprietorships and other unincorporated businesses.
One particular downside to the Keogh plan: If you have no employees, your Keogh plan is not necessarily protected from creditors. If there are employees in the plan (other than owner/partners) then ERISA law protects the accounts from creditors, but without employees, ERISA has no jurisdiction over these accounts, and your assets may be subject to creditor claims, depending upon applicable state laws. Just something to keep in mind with the Keogh.
You’re eligible to participate in a Keogh retirement plan if you are:
- self-employed, a small business owner, or an active partner in an unincorporated business who performs personal services for the company
- a sole proprietor who files Schedule C
- in a partnership whose members file Schedule E (in this case, the partnership, not you, must establish the Keogh plan)
- working for another company, but working for your own business as well (for example, if you’re a writer with a day job and you’re earning royalties on your first book, the royalties count as self-employment income)
You are not eligible to participate if you are:
- a salaried worker for an incorporated business, with no other source of income
- retired and not receiving compensation from a business
- a volunteer at the business that offers the plan
For more information, see IRS Publication 560.
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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