Keogh plan definition
/What is a Keogh Plan?
A Keogh plan is a retirement plan that defers tax recognition of earnings put into the plan. The primary limitation on the plan is that individuals can contribute up to 25% of their earnings to the plan, with an upper cap that is adjusted each year for inflation by the Internal Revenue Service. The most common type of Keogh plan is the defined-contribution plan, where a certain amount is added to the plan each year. A less-used alternative is the defined-benefit plan, where the plan is designed to pay out a certain amount to the recipient, based on the person's current salary, years of employment, and other factors. The amount that can be paid out through a defined-benefit plan on an annual basis is also capped by the Internal Revenue Service, with an annual adjustment to factor in the effects of inflation. The funds in a Keogh plan can be accessed by an individual as early as age 59.5, and must be accessed, at least in part, beginning at age 72.
The Keogh plan concept is named after Representative Eugene Keogh, who worked to have the underlying legislation passed by Congress in 1962.
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Who Uses a Keogh Plan?
A Keogh is intended for use by self-employed individuals, though it can also be used by unincorporated entities, such as sole proprietorships and partnerships. Independent contractors are not allowed to use them.
Advantages and Disadvantages of Keogh Plans
A Keogh plan has a relatively high administrative burden, but it allows for higher contributions than other types of retirement plans. Consequently, it is mostly used by higher-income individuals who see a favorable cost-benefit in dealing with its administrative issues.
Terms Similar to Keogh Plan
Keogh plans are also known as HR10 plans or qualified plans.