Subject: Retirement Plans - Keogh

Last-Revised: 15 Apr 2009
From: A. Nielson, Chris Lott (contact me), James Phillips

A Keogh plan is a tax-deferred retirement savings plan for people who are self-employed, and is much like an IRA. The main difference between a Keogh and an IRA is the contribution limit. Although exact contribution limits depend on the type of Keogh plan (see below), in tax year 2009 a self-employed individual may contribute a maximum of $49,000 to a Keogh plan, and deduct that amount from taxable income. The limits for IRAs are much less, of course.

The following information was derived from material T. Row Price sends out about their small company plan. There are three types of Keogh plans. All types limit the maximum contribution, but additional constraints may be imposed depending on the type of plan.

Profit Sharing Keogh
Annual contributions are limited to 15% of compensation, but can be changed to as low as 0% for any year.
Money Purchase Keogh
Annual contributions are limited to 25% of compensation but can be as low as 1%, but once the contribution percentage has been set, it
cannot be changed for the life of the plan.
Paired Keogh
Combines profit sharing and money purchase plans. Annual contributions limited to 25% but can be as low as 3%. The part contributed to the money purchase part is fixed for the life of the plan, but the amount contributed to the profit sharing part (still subject to the 15% limit) can change every year.

Like an IRA, the Keogh offers the individual a chance for his or her savings to grow free of taxes. Taxes are not paid until the individual begins withdrawing funds from the plan. Participants in Keogh plans are subject to the same restrictions on distribution as IRAs, namely distributions cannot be made without a penalty before age 59 1/2, and distributions must begin before age 70 1/2.

Setting up a Keogh plan is significantly more involved then establishing an IRA or SEP-IRA. Any competent brokerage house should be able to help you execute the proper paperwork. In exchange for this initial hurdle, the contribution limits are very favorable when compared to the other plans, so self-employed individuals should consider a Keogh plan seriously.

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