You can’t run a company without managing your business finances well,
and saving and planning for retirement is an important part of this. Retirement planning is
particularly challenging as a small business owner because you’re on your own, and some of the more
well-known retirement plans are unavailable to you. For example, only a corporation can establish and
administer an employer 401(k) plan or 403(b) plan, and conventional pensions aren’t available to
What is a Keogh Plan?
A Keogh plan is a tax-deferred retirement plan for self-employed individuals, non-corporate small
businesses, and their employees. In a defined contribution Keogh plan, the business owner decides how much
to contribute. A defined benefit Keogh plan works like a self-funded pension plan. You can withdraw money
from a Keogh plan as early as age 59 and a half.
Thankfully, Keogh plans, more often called HR 10 or qualified plans, offer an alternative way for
self-employed individuals to invest in their retirement. This can be a great option for higher-income small
business owners, such as doctors and lawyers. It puts you more in control of your retirement savings and
potentially allows you to save more than you could with other retirement vehicles. We’ll explain more about
the Keogh plan, the options for saving, and how to start one.
Keogh Plan Eligibility
Named for its creator, Congressman Eugene Keogh, a Keogh plan is a type of retirement account for
self-employed individuals, certain types of small business entities, and their
employees. It is not available to freelance workers or independent contractors. The IRS commonly refers to a
Keogh plan as an HR 10 plan or qualified plan.
All of the following are eligible to use a Keogh plan:
Self-employed professionals, such as doctors and lawyers
Small businesses that are set up as sole proprietorships,
partnerships, or limited liability companies (LLCs)
Eligible employees of these small businesses, though the employer must make the full contribution.
Eligible employees must be 21 years old and work at least 1,000 hours per year for your company.
Just like an Individual Retirement Account (IRA), a Keogh plan can be used to invest in stocks, bonds, and
mutual funds, and certificates of deposit. You can decide the mix of funds that you want to invest in. The
younger you are, the wiser it is to invest in more volatile investment options like stocks. You should be
more risk averse as you approach retirement age.
Types of Keogh Plans
There are two main types of Keogh plans. We’ll discuss each one in turn.
Defined Contribution Plans
Defined contribution Keogh plans are exactly as they sound. These are accounts in which you define the
contribution that you make each year to your plan. There are two types of defined contribution plans. While Keogh
plans still exist today, they’re mainly used by highly compensated individuals because they offer high
contribution limits. Unfortunately, the administrative burden of operating them can be substantial.
Contributions to Keogh plans can be made with pre-tax dollars, subject to annual contribution limits.
Profit Sharing Plans
With a profit sharing Keogh plan, you decide on a dollar amount that you want to contribute each year. Your
company doesn’t necessarily have to be profitable in order to set up a profit sharing plan. Your
contribution amount can change from year to year, but there’s a cap on contributions that’s equal to 25% of
your net self-employment earnings.
Money Purchase Plans
Money purchase plans require that an enterprise contribute a pre-determined percentage of its income to a
Keogh account each year, and that number is decided in the founding documents for the business. If the
company fails to reach this contribution level, they must pay a penalty to the IRS. You can contribute up to
25% of the company’s earnings, and you cannot change the percentage level if your company made a profit.
In the past, businesses chose this rigid option as opposed to the flexible profit sharing plan because the
limits on both contributions and deductions were higher with this type of account. However, the IRS
rescinded this incentive, and set the same maximums for money purchase plans as profit sharing plans. Thus,
a small enterprise is likely to select this version of a Keogh account only if an investor or lender demands
it. The advantage of this choice is that it provides certainty regarding Keogh contributions.
Defined Benefit Plans
You can contribute up to 100% of your compensation to a defined benefit plan, which makes this a good
option for high income earners. However, per table below, the IRS has set the maximum annual benefit at
for the respective years.
Every year, there has typically been a slight cost of living increase in the maximum annual benefit. This is
noteworthy but not a guarantee of future hikes.
With a defined benefit Keogh plan, the business owner selects the benefit they wish to receive upon
retirement, and works backward to determine the annual contribution required to achieve that amount. The
contribution required and the deduction allowed to reach your benefit goal are complex to compute. An
actuary uses variables like your age and expected return on investments to calculate this figure.
When Can You Access Money from a Keogh Plan?
As with any qualified retirement account, you can withdraw money from a Keogh account without penalty as
early as 59 and a half years old. The latest you can begin withdrawals is by age 70 and a half.
If you choose to access your money before age 59 and a half, you’ll take what is called an early
distribution. An early distribution is subject to current federal and state income taxes at the time of
withdrawal, plus a 10% penalty. You might owe state tax penalties as well. There are a few exceptions to the rules against early distribution, for issues like
large medical bills and disability.
If you reach your seventies and are still working, you can keep contributing to your Keogh plan, but you
must also make required withdrawals.
How are Keogh Plan Contributions Taxed?
Similar to a 401(k) plan, a Keogh plan is a tax-deferred retirement account. This means you don’t pay
income taxes on the money as you make contributions to your account, which lowers your total tax burden each
year you pay into the plan. Eventually, though, you’ll be taxed on this money, when you withdraw from the
account during retirement.
By the time you make withdrawals, you might be in a lower tax bracket, as you’re no longer employed and
making less money. So, you will pay fewer taxes than you would have had you been taxed on your contributions
Keogh Plans vs. Other Self-Employed Retirement Plans
The Keogh plan is just one of many retirement plans for self-employed individuals and small business owners. Here are some
other retirement plan options and they compare to the Keogh plan:
Solo 401(k) – This plan is similar to a regular 401(k), but a Solo
401(k) is designed especially for self-employed individuals. You’re eligible only if you have no
Traditional IRA – Traditional IRAs are the simplest types of retirement accounts
to set up. Contribution limits are much lower than a Keogh plan, but the administrative burden is also
SEP IRA - SEP plans are very similar to defined-contribution Keogh plans, but require less
paperwork than a Keogh plan. Unlike a Keogh plan, there’s no need for annual reporting with an SEP, and
you don’t have to contribute to an SEP every year.
Read More about the SEP IRA Limits
SIMPLE IRA – A SIMPLE
IRA is a good option for larger businesses and those with employees because employees can make their
own contributions. However, employers are generally required to make matching contributions.
Roth IRA – A Roth IRA lets you set aside after-tax income for retirement. This option is best for those who think
they’ll be in a higher tax bracket when they retirement. However, there are income limits on who is
eligible and the contribution limits are lower than a Keogh plan. Please review the following tables:
If you have an existing Keogh plan but decide that one of these other plans is a better choice for you, you
can usually rollover assets to the new plan. Make sure you contact your plan provider and complete your
rollover within the specified time frame (usually 60 days) to avoid being taxed for early withdrawal.
Usually, it’s also possible to have multiple retirement plans. For instance, you can have a Keogh plan and
an IRA. However, there might be additional limits on how much you can contribute to each plan.
How to Set Up a Keogh Plan
In order to set up a Keogh plan, you must work with a plan administrator who provides these types of plans.
Banks, insurance companies, private brokers, independent administrators, law firms, and accounting firms
provide Keogh plans. You must hire an actuary for a defined-benefit plan.
In general, you must establish a Keogh plan by December 31 of the year that you want the plan to take
effect, and make your initial contributions by April 15 of the following year. If you qualify for an
extension on filing your tax return, that also gives you more time to fund your Keogh plan.
Anyone with a Keogh plan must file Form 5500 with the IRS each year.
Bottom Line: Is a Keogh Plan Right for You?
The main reason that small business owners select a Keogh plan is that they have high contribution and
deduction limits. These limits are based on percentages of net profit, however, which means that you’ve
already deducted self-employment tax and contributions to employee retirement funds, so these amounts aren’t
as attractive as they initially seem.
In addition, Keogh accounts are expensive to establish and to maintain. These plans require complicated IRS
paperwork yearly and incur costly annual fees.
If your business has any employees, the law requires that you allow them to participate in your Keogh plan.
Unlike other qualified plans, however, the employer is the sole investor; the employee contributes nothing
to the plan. While you can deduct from your own tax burden the contributions that you make to your Keogh
account on your employees’ behalf, you’ll still foot their entire retirement bill.
Finally, if you create a Keogh account, your financial information becomes public record. Most small
businesses aren’t ready to air their financial dirty laundry, and understandably so.
Thus, if you’re the sole employee of your company, you’re well-to-do, and you desire to save more money at
a faster rate—perhaps because you plan to retire soon—the Keogh account is a good choice for you. For most
individuals, however, the disadvantages of a Keogh plan outweigh the advantages—which is why you rarely see
them discussed in retirement planning today.