A Keogh plan, also known as HR10 plan, is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. It allows for larger amounts of cash to be stashed away for retirement than other retirement plans. There are two types of Keogh plans: profit-sharing and defined-benefit. Profit-sharing Keogh allows contributions to vary each year, but the annual maximum limit is capped. On the other hand, the defined benefit Keogh provides a fixed benefit based on salary and years of service.
1. Who can get a Keogh plan?
A Keogh plan is designed for self-employed individuals or unincorporated businesses. This could include sole proprietorships, partnerships, and LLCs. They’re especially beneficial for individuals who want to save more than the limits set by other retirement accounts like the IRA or the 401(k).
2. Are there any limits to how much I can save with a Keogh plan?
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Yes, there are limits. For a profit-sharing Keogh plan, you can contribute up to 25% of your net earnings from self-employment, with a maximum limit of $57,000 for the 2020 tax year. For defined benefit plans, the limit is typically higher and based on your age and earnings.
3. Can I have a Keogh plan alongside other retirement plans?
Yes, you can. It’s possible to have a Keogh plan along with other retirement plans like an IRA. However, it’s crucial to be aware of the respective contribution limits for each plan.
4. How does the Keogh plan impact my taxes?
A Keogh plan is designed to provide tax benefits. Contributions to your Keogh plan are typically tax-deductible, reducing your taxable income. Furthermore, the income generated in these accounts can grow tax-deferred until it’s time to take distributions in retirement.
5. What happens if I need to access my money before retirement?
Generally, early withdrawals before age 59.5 from a Keogh plan may trigger penalties and taxes, so it’s designed to be a long-term savings tool. However, there may be exceptions under certain hardship circumstances.