Keogh plan

A Keogh plan is a tax-deferred savings vehicle serving as a RETIREMENT PLAN for unincorporated businesses, usually small businesses or people who are self-employed. Keogh plans (which are also sometimes called “qualified plans” or “H.R. 10” plans) were named after New York Representative Eugene James Keogh and were first introduced in the 1960s. Keogh plans offer significant benefits over traditional INDIVIDUAL RETIREMENT ACCOUNTs (IRAs) and 401(K) PLANs for self-employed individuals and their employees. Like traditional IRAs and 401(k)s, Keogh plans allow for contributions to a retirement account, and the employee’s contribution is pretax, which reduces his or her taxable INCOME. This MONEY can be invested, and the interest from INVESTMENTs is tax-free until the money is withdrawn from the plan. There is an additional tax advantage to employers who receive a “dollar for dollar” tax write-off for any money contributed to an employee’s plan. The chief advantage of a Keogh plan over traditional retirement accounts is the fact that it is possible to contribute more money annually. The amount of contribution possible depends on the Keogh plan chosen, but in 2002 it was generally a maximum of $40,000 per year. However, this changes often due to legislation and INFLATION. There are two different Keogh plan options: the definedbenefit plan, and the defined-contribution plan. The defined-benefit plan is set up to give individuals a desired income upon retirement. There is a complex actuarial formula that is created individually for each employee to reach this income level, which cannot be more than the lesser of 100 percent of the employee’s average compensation for the three highest consecutive calendar years, or $135,000 of income per year. The more common defined-contribution plan allows for a maximum contribution of 100 percent of the employee’s actual compensation, or $40,000. With defined-contribution plans, there are several ways that the money can be contributed. The most popular is the PROFIT SHARING plan, which allows employers to contribute up to 25 percent of all compensation per year to all participants in the plan. The employer also has the discretion to contribute nothing. Another option is a money-purchase plan in which the employer is required to contribute a set percentage of the employee’s compensation regardless of whether the company makes a profit or not. It is also possible to combine the profit-sharing and money-purchase options so that a portion is at the discretion of the employer and a portion is set. One important note is that if a self-employed individual has a net loss for any year, that individual cannot contribute to his or her plan but may still contribute to his or her employee’s plan. Because Keogh plans are so complicated, it is usually necessary to have a retirement specialist set them up. Such specialists are a good source for more detailed information regarding Keogh plans. Details about the most current versions of Keogh plans can be found on the Internal Revenue Services website in Publication 560, available in PDF format on the INTERNET at http://www.irs.gov/pub/irspdf/p560.pdf; the information is in the section entitled “Qualified Plans.” Joseph F. Klein