Keogh Plans

Keogh or H.R. 10 plans are nothing more than qualified retirement plans for self-employed individuals. A Keogh plan can take the form of a defined contribution plan, like a profit-sharing plan or money purchase plan, or a defined benefit plan.

Planning Tools Although IRS forms like Form 5500 still refer to Keogh plans, most financial and investment institutions simply refer to the specific type of plan involved. You can download Form 5500 to aid in your financial planning.

When originally enacted in 1963, Keogh plans were rather limited, but they provided the only option for a self-employed individual to save for retirement. Over the years, the tax laws have changed to eliminate the distinctions between corporate and Keogh plans. In addition, other plans for the self-employed have developed, like Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs).

Setting up a Keogh plan is fairly easy. The employer (including self-employed individuals) can adopt a generic master or prototype plan already approved by the IRS. The IRS-approved plans can be provided by banks, trade or professional organizations, insurance companies, and mutual funds. If you are a regular employee working for an employer with a Keogh plan, you simply have to contribute to the extent allowed under the plan.

Contributions. The maximum amount you can contribute to a Keogh depends on whether it is a defined contribution or a defined benefit plan. For 2008, the annual benefit for a defined benefit plan participant cannot exceed the lesser of 100 percent of the participant's average compensation for his or her highest three consecutive years or $185,000 ($180,000 in 2007; $175,000 in 2006). If it is a defined contribution plan, annual contributions and other additions in 2008 (except for earnings) to an account cannot exceed the lesser of 100 percent of the compensation actually paid to the participant or $46,000 ($45,000 in 2007; $44,000 in 2006).

Rollovers and Distributions. The rules for rollovers and distributions from a Keogh plan are generally the same as those for other qualified plans. As with 401(k) rollovers, Keoghs can usually be rolled over to another qualified plan that accepts rollovers or to an IRA type arrangement. Unlike the rule for 401(k) distributions, however, hardship distributions are not permitted for Keogh plans.