The Granddaddy of ’em All: Keogh Plans

Ah, the 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 late-boomer like me!) the Keogh or HR10 plan is essentially a vehicle that allows the self-employed to establish pension plans just like the big companies can. 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 many 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, you can invest in most common investment vehicles within a Keogh plan.

The real benefit of a Keogh plan over a SIMPLE or other types of plans available to small employers is in the higher limit for contributions. In the Keogh plan, up to $56,000 (for 2019) can be contributed and deducted, limited to 25% of the overall compensation of the employee.

Alternative retirement plan vehicles such as the solo 401(k) plan have lessened the need for the Keogh plans in the defined contribution arena. However, 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