Who Were Keogh Plans Designed to Provide Pension Benefits?
The Keogh plan was initially created to offer self-employed individuals a way to build retirement savings in the same way employees of large corporations can use pension plans or 401(k)s. Over time, the plan has become less common as new alternatives such as SEP IRAs, SIMPLE IRAs, and Solo 401(k)s have emerged. Despite this, Keogh plans are still an option for certain businesses and individuals, particularly those with higher incomes who wish to contribute more to their retirement savings than they would be able to with a standard IRA.
While the term “Keogh” is still widely recognised, it has mostly been replaced by the term “qualified retirement plans” by the IRS. However, the general features and benefits of a Keogh plan remain unchanged.
History and Background
The Keogh plan originated in the early 1960s when the Self-Employed Individuals Tax Retirement Act was passed. This legislation responded to the growing need for self-employed individuals to save for retirement in a structured and tax-advantaged way. The plan was named after Representative Eugene James Keogh of New York, who was instrumental in getting the bill passed.
Keogh plans initially provided a significant benefit to self-employed individuals, as they allowed higher contribution limits than most other retirement accounts available at the time, such as individual retirement accounts (IRAs). In the early days, the Keogh plan was an essential retirement tool for self-employed professionals, particularly professionals like doctors, lawyers, and consultants.
However, in 2001, the Economic Growth and Tax Relief Reconciliation Act changed the retirement savings landscape. Although Keogh plans still exist today, other retirement accounts like SEP IRAs and Solo 401(k)s have become more popular due to their simpler administrative processes and lower costs. Despite these changes, the Keogh plan remains an option for self-employed individuals and business owners who wish to contribute more to their retirement funds.
Types of Keogh Plans
Keogh plans are divided into two main types: defined contribution plans and defined benefit plans. Each type has its unique features, and the one that works best for you will depend on your income level, business structure, and retirement goals.
Defined Contribution Plans
Defined contribution Keogh plans are the most common type. They work by allowing you to contribute a set portion of your income each year to your retirement account. The amount you can contribute depends on your income level, but it is generally a percentage of your earnings, capped at a maximum annual limit.
Within the defined contribution category, there are two main subtypes of plans:
Profit-sharing plans
This type of defined contribution plan allows businesses to contribute to their employees’ retirement accounts based on company profits. The contributions can vary from year to year, meaning they are not fixed. This flexibility makes them an attractive option for businesses with fluctuating income. For 2025, the maximum contribution is the lesser of 25% of an employee’s compensation or $70,000, with a higher limit of $77,500 for individuals aged 50 and over.
Money purchase plans
Unlike profit-sharing plans, money purchase plans require businesses to make a fixed contribution each year, regardless of whether the company makes a profit. These contributions are calculated as a set percentage of each participant’s compensation. The contribution limits for money purchase plans are the same as those for profit-sharing plans.
Defined Benefit Plans
A defined benefit Keogh plan is more like a traditional pension plan. With this plan, the employer promises to provide a fixed, predetermined amount of money each year upon retirement. The annual benefit amount is usually based on a formula considering the employee’s years of service and salary.
The main difference between defined benefit plans and defined contribution plans is that the latter depends on contributions, whereas the former guarantees a specific benefit upon retirement. Business owners often use defined benefit plans to ensure that they and their employees receive a predictable income when they retire.
For 2024, the maximum annual benefit for a defined benefit Keogh plan is $280,000, or 100% of an employee’s compensation, whichever is lower.
Eligibility and Contribution Limits
Who Can Participate in a Keogh Plan?
Keogh plans are specifically designed for unincorporated self-employed individuals and businesses. This means that sole proprietors, partnerships, and some limited liability companies (LLCs) can set up a Keogh plan. However, the plan is not available to employees working for large corporations, and corporate entities or C-corporations cannot use it.
Keogh Plan Max Contribution
Keogh plan maximum contribution refers to the highest amount a participant can contribute to their plan annually. It varies based on the plan type (defined contribution or defined benefit) and the participant’s compensation. For defined contribution plans, the limit is 25% of compensation or a specific maximum dollar amount, while defined benefit plans provide a fixed annual benefit limit. These limits are adjusted annually for inflation.
For Keogh plans in 2025, the maximum contribution for defined contribution plans is the lesser of 25% of compensation or $70,000 for individuals under 50 and $77,500 for those aged 50 and above. For defined benefit plans, the maximum annual benefit is the lesser of 100% of the participant’s compensation or $280,000.
As contribution limits are much higher than those for retirement accounts like traditional IRAs or Roth IRAs, Keogh plans appeal to high-income individuals and business owners.
| Year | Defined Contribution Limit (Under 50) | Defined Contribution Limit (50 and Above) | Defined Benefit Limit |
|---|---|---|---|
| 2021 | $58,000 | $64,500 | $230,000 |
| 2022 | $61,000 | $67,500 | $245,000 |
| 2023 | $66,000 | $73,500 | $265,000 |
| 2024 | $69,000 | $76,500 | $275,000 |
| 2025 | $70,000 | $77,500 | $280,000 |
Pros of Keogh Plans
There are several advantages to choosing a Keogh plan for your retirement savings. These benefits make it an excellent option for self-employed individuals and small business owners who want to maximise their retirement contributions.
High Contribution Limits
Keogh plans allow for more significant contributions than retirement accounts like IRAs. This makes them especially attractive for high-income earners who want to save more for retirement. The contribution limits for Keogh plans are much higher than those for traditional or Roth IRAs, allowing self-employed individuals to set aside more of their income.
Tax Advantages
Contributions to a Keogh plan are tax-deductible, reducing your taxable income for the year the contribution is made. Additionally, the earnings in a Keogh plan grow tax-deferred, meaning you do not have to pay taxes on the money until you withdraw it in retirement.
Flexibility in Structure
Keogh plans offer flexibility in how they are structured. Depending on your retirement goals and business needs, you can choose between a defined contribution plan, such as a profit-sharing or money purchase plan, or a defined benefit plan. This allows you to tailor the plan to suit your financial situation.
Retirement Security
A Keogh plan can provide a reliable source of income in retirement, particularly for business owners who want to ensure a steady income stream. The defined benefit plan guarantees a specific payout at retirement, which can be an appealing option for those looking for more security.
Keogh Plan Rules Set by the IRS
- Contributions are tax-deductible, but the amount you can contribute each year is limited.
- Withdrawals before age 59 ½ incur a 10% penalty unless an exception applies.
- After turning 73, you must take required minimum distributions, taxed as ordinary income.
- You can also roll over your Keogh plan into other retirement accounts, such as a traditional or Roth IRA, but converting to a Roth IRA may result in a taxable event.
Cons of Keogh Plans
While Keogh plans offer many benefits, there are also several drawbacks you should consider before choosing this type of retirement plan. These disadvantages can make Keogh plans less appealing for specific self-employed individuals and small businesses, especially compared to more straightforward retirement options.
Administrative Complexity
One of the main disadvantages of a Keogh plan is the significant amount of administrative work required to maintain the plan. Setting up a Keogh plan typically involves creating a written plan document that complies with IRS regulations. This requires careful planning and understanding of the rules and regulations surrounding retirement plans. Additionally, businesses must file IRS Form 5500 annually, which requires more paperwork and can be time-consuming.
High Costs
Due to the complexity and administrative requirements of Keogh plans, the costs of setting up and maintaining the plan can be higher than those associated with more straightforward retirement plans such as SEP IRAs or Solo 401(k)s. There may be initial setup fees for creating the plan, and ongoing maintenance costs for managing the account, filing the necessary paperwork, and ensuring compliance with IRS rules. These costs can add up, especially for small businesses with limited resources.
Limited to Specific Businesses
Keogh plans are only available to unincorporated self-employed individuals and businesses. This means that sole proprietors, partnerships, and some LLCs can use Keogh plans, but corporations and other formal business structures are not eligible. If you are part of a corporation or are considering incorporating your business, a Keogh plan may not be an option.
Contribution Limits May Be Challenging for Lower-Income Earners
Although Keogh plans offer higher contribution limits than other retirement accounts, these limits may not always be achievable for lower-income self-employed individuals. For example, if you have a small business with lower profits, contributing the maximum allowed amount may not be feasible. In such cases, other retirement options like SEP IRAs or SIMPLE IRAs, which offer lower contribution limits but are easier to manage, may be more appropriate.
Not as Widely Used as Other Retirement Plans
Keogh plans have become less common in recent years, primarily due to the availability of more straightforward, more cost-effective alternatives such as SEP IRAs, Solo 401(k)s, and SIMPLE IRAs. These alternatives are often easier to set up and maintain, with fewer administrative requirements and lower costs. As a result, many self-employed individuals and small businesses opt for these options instead of Keogh plans.
Steps to Set Up and Manage a Keogh Plan
Choose the Right Plan Type
The first step in setting up a Keogh plan is deciding whether you want a defined contribution plan (e.g., profit-sharing or money purchase plan) or a defined benefit plan. Your choice will depend on your business structure, income level, and retirement goals. A defined contribution plan may be the best option if you prefer flexibility in contributions. A defined benefit plan might be more suitable if you want to guarantee a specific retirement benefit.
Adopt a Written Plan
To establish a Keogh plan, you must adopt a written plan document that complies with the requirements set by the IRS. This document should outline the plan’s rules, including how contributions will be made, the contribution limits, and the employee vesting schedule (if applicable). Many financial institutions, such as banks and brokerage firms, offer pre-approved prototype plans that meet IRS requirements, making the process easier.
File IRS Form 5500
As part of the ongoing management of a Keogh plan, you must file IRS Form 5500 annually. This form provides the IRS with information about the plan’s financial status, participant contributions, and investments. The form must be filed by the end of the seventh month following the plan year’s end.
Make Contributions
Once your Keogh plan is set up, you can begin making contributions. Contributions to a Keogh plan are tax-deductible to reduce your annual taxable income. The amount you contribute will depend on the type of plan and your income level, but the contribution limits are generally higher than those for other retirement plans.
Monitor the Plan and Ensure Compliance
Ongoing management of a Keogh plan involves monitoring the plan’s investments, ensuring that contributions are made on time, and maintaining compliance with IRS rules. You may need to adjust the plan each year based on changes in income, tax laws, or business needs.
Withdrawals and Distributions
When you reach the age of 59 ½, you can begin withdrawing funds from your Keogh plan without incurring the 10% early withdrawal penalty. You must also start taking minimum distributions from the plan once you reach age 73. These distributions are subject to ordinary income tax.
Keogh Plan Alternatives
When choosing a retirement plan, it is important to compare different options to determine which one best suits your needs. Keogh plans have some unique features that set them apart from other retirement plans but also have limitations.
SEP IRAs (Simplified Employee Pension)
A SEP IRA is one of the simplest and most cost-effective retirement plans for self-employed individuals and small businesses. Compared to a Keogh plan, SEP IRAs have fewer administrative requirements and lower setup and maintenance costs. SEP IRAs are also easier to manage because they do not require the filing of IRS Form 5500, which is necessary for Keogh plans.
The contribution limits for SEP IRAs are lower than those for Keogh plans, but they are still relatively high. In 2025, the maximum contribution for a SEP IRA is the lesser of 25% of compensation or $66,000. For those over 50, the contribution limit is slightly higher due to catch-up contributions. SEP IRAs are also easier to set up, making them an attractive option for small businesses and self-employed individuals who do not need the complex structure of a Keogh plan.
Solo 401(k)
A Solo 401(k) is a retirement plan designed for self-employed individuals with no employees other than their spouse. This plan offers high contribution limits, similar to those of Keogh plans, and provides both employer and employee contribution options. For 2025, the maximum contribution limit for a Solo 401(k) is $66,000, or $73,500 for individuals aged 50 and over, which aligns with Keogh plan contribution limits.
One of the main advantages of a Solo 401(k) is its flexibility. It allows you to make both salary deferrals (as an employee) and employer contributions, allowing you to save more for retirement. Additionally, Solo 401(k)s are easier to set up and manage than Keogh plans, with fewer administrative requirements. This makes Solo 401(k)s a popular choice for many self-employed individuals.
SIMPLE IRAs (Savings Incentive Match Plan for Employees)
SIMPLE IRAs are another option for self-employed individuals and small businesses with fewer than 100 employees. While they offer lower contribution limits than Keogh plans, they are easier to set up and maintain. SIMPLE IRAs have a contribution limit of $15,500 in 2025, with an additional catch-up contribution of $3,500 for individuals aged 50 and over.
SIMPLE IRAs are ideal for businesses that want to offer a retirement plan without the complexity and administrative costs associated with other options like Keogh plans. However, the lower contribution limits may make SIMPLE IRAs less suitable for high-income earners who wish to save more significant amounts for retirement.
FAQs
What is another name for a Keogh plan?
A Keogh plan is a qualified retirement plan or HR 10 plan. The IRS introduced this name change, although many still refer to it as a Keogh plan.
What is the difference between a Keogh plan and an IRA?
A Keogh plan allows higher contribution limits and is only for self-employed individuals or unincorporated businesses. IRAs, on the other hand, are available to anyone with earned income and have lower contribution limits.
Can you withdraw money from a Keogh plan?
You can withdraw money from a Keogh plan after age 59 ½ without a penalty. However, early withdrawals may be subject to a 10% penalty unless a hardship exemption applies.
What is the Keogh plan limit for 2024?
The contribution limit for defined contribution Keogh plans in 2024 is 25% of compensation or up to a specified dollar amount, with a maximum limit of $70,000 for those under 50.
Who cannot participate in a Keogh plan?
Employees of large corporations and individuals working for incorporated businesses cannot participate in a Keogh plan. It is only available to self-employed individuals and certain unincorporated businesses.
