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Keogh Plans

H.R. 10 Plans

Keogh plans are retirement plans for self-employed individuals,  ie. sole proprietors, partners in a partnership,1 and employees of either. The differences between Keogh plans and corporate sponsored plans are small, and are limited to different treatment of life insurance and participant loans.

The Basics Of Keogh Plans

Plan type: A Keogh plan may be either a defined contribution plan or a defined benefit plan.

Contribution limits: For defined contribution plans, 25% of earned income 2 or $30,000, whichever is less. For defined benefit plans, the contributions are determined by the plan actuary. The deduction for contributions to a defined benefit plan may not exceed "net" self-employment income. In unusual circumstances, the required contribution may exceed the allowable deduction.

Benefit limits: Defined benefit Keogh plans are subject to the same percentage of average compensation and dollar limits that apply to all defined benefit plans. For 2000, the maximum dollar limit is $135,000.

Funding: May use a trust, a custodial account or an insurance company annuity 

Evidence of plan: The plan must be in writing and meet certain coverage and non-discrimination requirements for present and future employees.

Distributions: Distributions prior to age 59˝ (other than for disability or death) are subject to both a 10% penalty and current income tax. However, if an employee terminates service on or after age 55, 3 or receives a series of substantially equal periodic payments based on his or her life expectancy (or joint life expectancy with a designated beneficiary), the penalty is avoided. For more than 5% owners, distributions must begin when the participant reaches age 70˝.

Payment plans available:

bulletLump-sum distribution
bulletLifetime of the participant (and spouse if desired).
bulletA fixed period of years not to exceed the participant’s life expectancy, or the joint life expectancy of the participant and a designated beneficiary. IRC Sec.401(a)(9)

Other plans: A participant in a Keogh plan may also have a traditional, deductible IRA (subject to certain income level limitations based on filing status), a traditional, nondeductible IRA, or a Roth IRA.

Taxation: Distributions are generally taxed as ordinary income. Special 10-year income averaging may be available for certain individuals.

401(k) feature: A 401(k) feature may be added, if desired, to a profit sharing plan.

Allocation methods: The same kind of allocation methods available under a corporate sponsored defined contribution plan are also available. These can be integrated with Social Security, age weighted or tiered.

Participant loans: Participant loans are not available to self-employed participants. If a participant loan is made to a self-employed individual, serious, adverse tax consequences can result.

Top-heavy plans: If more than 60% of plan assets are allocated to key employees, the employer must contribute at least as much for non-key participants as it does for key employees. This requirement applies only to a contribution of up to the first 3% of includable compensation (higher in some instances).


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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright © 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017