A dream job as a self-employed person or a small business owner may seem like a good idea. Unfortunately, you won’t have access to either a 401k or a retirement plan at work. Even though you can contribute up to $6,000 annually, it might not suffice to help you reach your savings goals. Keogh plans (pronounced Key-oh) are a way to get there. 

What Is a Keogh plan?

A Keogh Plan is a retirement plan that can be used by self-employed people and employees of unincorporated businesses. Keogh contributions can be made using pre-tax dollars. However, there are annual contribution limits.

Keogh plans are defined as defined benefit plans that provide a guaranteed retirement income. But most Keogh plans can be structured as defined contribution plans. These plans allow workers to contribute a portion of their income rather than guaranteeing an income. The following are the most common Keogh plans.

Profit-sharing plans allow companies to contribute less than 25% of the compensation.

Qualified defined benefit plans are ideal for retirees. The amount is based upon employees’ years of service.

Keogh’s plans were named after the New York congressman Eugene James Keogh. He championed the passage of the Self-Employed Individuals Tax Retirement Act of 1962. The law enabled unincorporated companies to sponsor retirement plans for their employees. Since the IRS said this term is obsolete, Keogh plans are known as HR 10s or qualified retirement plans.

Keogh Plan Rules

The IRS offers qualified plan rules intended for Keogh plans. Here are the plan rules:

Should be self-employed:  to be eligible for the plan, you must have self-employment. Having another active plan does not disqualify you if you still earn from your self-employment activities.

It can be a defined benefit or contribution plan: although costs may vary, you may opt for any option. Defined benefit plans attract higher contribution limits but have actuarial costs.

Should offer to qualified employees: you should avail the plan to employees at least 21 years of age or those who work for you for at least 1000 hours in one calendar year.

The setup should be done before the year ends: you cannot set up the Keogh plan between the deadline for filing tax and the end of the year. You should therefore set it up during the period it is effective.

Withdrawal age limits: when can you withdraw from a Keogh? You cannot withdraw money before 59 ½ under Keogh plans.

72 years is the minimum distribution age: if you turn 72 and still have a balance in your Keogh, you should take distributions from your account.

Remit taxes on distributions: Keogh’s plan withdrawal charges attract income taxes.

You should file an IRS form 5500. You must file form 5500 annually to report data on your plan to the IRS.

Keogh Plan Advantages and Disadvantages

We’ve already answered the question “what is a Keogh plan?” Now, we’re going to list the pros and cons:

Pros

• It can be opened as either a defined benefit plan or a defined contribution plan

• It has high contribution limits

• There are pre-tax contributions

Cons

• There are numerous costs and paperwork as opposed to other retirement plans

• May need professional management

• Only ideal for business owners and self-employed workers

Keogh Plan Contribution Limits in 2023

How much can you contribute to a Keogh? Here are the amounts and limitations:

Employee Contribution Limit : 2023 401(k) / 403(b)

Individuals under the age of 50 will pay up to $22500 in 2023 for total employee contributions to 401(k)  and 403(b). The catch-up contribution limit will be $7500. Therefore, individuals over 50 will pay $30,000 in 2023 for their 401(k) employee contribution.

Total Contribution Limit : 2023 401(a) /403(b)/ 401(k)

All employer and employee contributions per employer in 2023 will be $66,000 for individuals under 50. The total contribution of individuals over 50 years will be $73500 since the catch-up contribution is now $7500. Remember, the 403(b) limit is independent of 401(a). So you can get $66,000 from each of the options.

Contribution Limit : 2023 457(b)

457(b) contribution limits will be $22500 in 2023. This option has special catch-up contribution rules. So, talk to your plan administrator if you want to put more in your 457(b).

Traditional and Roth IRA Contribution Limits in 2023

Traditional and Roth IRA contribution limits will be $6500 for those less than 50 and $7500 for those above 50.

SEP-IRA Contribution Limits in 2023

For 2023, SEP-IRA will be $66,000

SIMPLE 401(k) and SIMPLE IRA Contribution Limits in 2023

SIMPLE 401(k) and SIMPLE IRA will be $15,500 in 2023

Health Savings Account (HSA) Contribution Limits in 2023

For single individuals, the limit in 2023 is $3850. Family coverage, on the other hand, is $7700

Flexible Savings Account (FSA) Contribution Limits in 2023

Healthcare FSA contribution limits for 2023 will be $3050. Keep in mind that other FSA types, such as dependent care FSAs, have their own limits.

What Is the Difference Between a Keogh Plan and a 401k?

The 401(k) is the alternative to the Keogh plan. And even though they are similar in many ways, their fundamental differences made the 401(k) more popular.

The 401(k) is a qualified contribution plan sponsored by the employee. You can open this plan if your employer offers one. You make contributions based on your company’s policy. Your employer will contribute as well.

Even though Keogh plans are meant for the self-employed and their workers, more people opt for 401(k) plans. If you are self-employed, you can open a solo 401(k), which is also called an individual 401(k) or one-participant 401(k).

One-participant 401(k) plan lets you contribute an extra 25% of your net earnings to the account on top of the standard contribution limits, totaling $66000 for 2023. Also, 401(k) plans are easy to manage and straightforward. They also don’t attract administrative burdens.

Who Cannot Participate In a Keogh Plan?

Freelance workers or independent contractors cannot participate in the Keogh plan. The same is true for one member of a partnership – they cannot participate independently. Self-employed individuals can participate in the Keogh plan, but they should first establish a business.

Conclusion

Now you know the answer to “what is a Keogh plan?” As a self-employed or small business owner, you must carefully consider many retirement plans when searching for the best plan. SEP-IRAs, solo 401(k)s, and individual 401(k)s may be better options than Keogh plans. And if you were wondering, “can I roll a Keogh into an IRA?”, the answer is yes, you can. The qualified plan plans, however, should not be forgotten when looking at plans.