Retirement Accounts for the Self Employed (Part 4 of 5) - The Keogh

Ok folks, another entry for the self starters out there! Part 4 of how to sock your money away for retirement for the self employed. Non self employed folks, come back next week and I'll some good stuff for you! So let's do this... Part 4 - The Keogh.

Keogh plans are the self-employed equivalent of corporate retirement programs. They come in two basic flavors: profit-sharing plans and defined benefit pension plans.

Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income or compensation and subject to a $45,000 ceiling. A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).

Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $180,000. Each year's contribution must be calculated by an actuary — the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns. Annual actuarial fees and the required IRS report can run up to a couple grand. Another negative: You're locked into making the actuarially determined contribution each year. However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble — because it permits much bigger contributions than any other type of program. If you're younger, go with a SEP, profit-sharing Keogh or Solo 401(k).


To put this entry in perspective, the Keogh plan is quite complicated and probably not appropriate for most self employed folks out there. Keogh setup and ongoing fees for paperwork and for professional guidance are more suited to self-employed individuals with established businesses and consistent incomes. One reason behind this limited parameter is that once you open a determined benefit contribution plan, you're locked into that contribution every year.

Do I Qualify For A Keogh?

Any sole proprietors, partnerships, LLCs, and anyone with self-employment income.

Are Keogh Contributions Pre or Post Tax?

Keogh plan contributions are deducted from pre tax income and contributions and interest income are tax deferred until withdrawal.

Where Do I Set Up a Keogh?

A Keogh plan is something you REALLY want to talk to a live financial advisor about.

How Much Can I Contribute Annually to a Keogh for myself?

You will encounter the same $45,000 ceiling for contributions to a Keogh profit-sharing plan but you can set a ceiling as high as $180,000 for a defined benefit Keogh plan.

Why Not Just Open a Traditional or Roth IRA?

Do Both!

When Do I Set This Up?

If you are establishing a plan for the first time, complete the Adoption Agreement(s) by December 31 (Simplified Keogh plan) or your fiscal year-end (Standard PSP/MPP plan), and you will be eligible for a deductible contribution for this year.

What If I Already Participate In My (Other) Employers Plan?

I was not able to get a definitive answer about this.

Do I Have to Put Away the Same Amount of Money Every Year?

With a profit-sharing plan you can vary annual contributions from 0 - 25% of compensation per year or skip a year if business conditions change.

With a defined benefit pension plan you make fixed contributions each year (1 - 25% of compensation) as your commitment to retirement benefits but once you select a percentage, you must contribute that same percentage each year, no more and no less. This contribution cannot be changed unless you amend the plan.

What If I Have Employees?

I was not able to get a definitive answer on this one!

Next Stop!

In Part 5 I will sort out what plans make sense for your individual situation!

For the rest of this series:

Please contact Dollars & Sense Education to bring our seminars to your company or organization!


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