What Is a Keogh Plan?

How a Keogh Plan Works

A Keogh (KEY-oh) plan is a tax-deferred retirement plan for self-employed people and unincorporated businesses. Keogh plans get their name from U.S. Representative Eugene Keogh of New York State, who was key in enacting the Self-Employed Individuals Tax Retirement Act of 1962. Because of his efforts, the legislation became known as the Keogh Act.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) removed the distinction between Keoghs and other plans. Therefore, the Internal Revenue Code no longer refers to these plans as "Keoghs." Instead, Keoghs are now known as "HR-10s" or "qualified retirement plans."

A Keogh is similar to a 401(k), but the annual contribution limits are higher. There is also much more to administering these plans than other types.

Self-employed people have other options that can be used that are not as costly to maintain. Some examples are the Simplified Employee Pensions (SEP-IRAs) or individual or solo 401(k)s. You could also choose a Savings Incentive Match Plan for Employees (SIMPLE) for your business.

Example of a Keogh Plan

For example, a sole proprietor can establish a Keogh or HR-10 retirement plan in which an amount is contributed each year toward the business owner's retirement savings. Suppose the owner decides to contribute a fixed amount of $20,000 per year to the plan. In turn, the funds are invested in mutual funds containing a basket of stocks or bonds. In retirement, the owner can withdraw funds as needed.

Types of Keogh Plans

There are two types of Keogh plans available: a defined contribution plan and a defined benefit plan.

Defined Contribution Plans

In a defined contribution plan, you define how much you'll place into the fund each year. There are two ways to define the amount: profit-sharing (your business is the only one that pays into it) or money purchasing (you contribute a fixed amount of your income every year into the plan).

Using a profit-sharing option, you can contribute up to $66,000 in 2023 (up from $61,000 in 2022) or up to 100% of your compensation to your plan, whichever is less. The amount you choose to contribute to a profit-sharing plan can change each year.

A money-purchase plan lets you decide at the outset how much of your profits you can place in a Keogh. The contribution limit is fixed and can't be changed. Limits for the money-purchase plan are the same as for profit-sharing: $66,000 in 2023 ($61,000 in 2022) or 100% of compensation, whichever is less.

Defined Benefit Plans

Defined benefit plans work like normal pension plans: you set a pension goal for yourself, and you fund it. Your annual benefit cannot exceed 100% of your average compensation over your three highest consecutive calendar years or $265,000 for 2023 ($245,000 for 2022), whichever is less.

You make contributions to each type of plan on a pre-tax basis. You also pay taxes each pay period on less and have the option of taking an upfront deduction on your income tax return.

Investing in a Keogh

As with a 401(k), you can defer taxes on the money you invest in a Keogh until retirement. You can begin taking distributions at age 59 1/2 but no later than April 1 of the year after you reach 72.

Withdrawals made before that time are taxed federally. They may even be taxed by the state you live in. You might pay a 10% penalty for early distributions unless certain exceptions apply.

You have to establish your qualified retirement plan before the end of the year you wish to receive the deduction, but you can make contributions for the prior year before you file your tax return by mid-April. If you file a tax extension, you have until mid-October.

Keogh Plan vs. 401(k)

Frequently Asked Questions (FAQs)