A Keogh or an HR-10 plan is a type of retirement savings specifically designed for self-employed individuals and small business owners. It provides a tax-advantaged way for these individuals to save for their retirement and offers several benefits over traditional retirement plans. In this guide, we’ll take a closer look at what a Keogh plan is, how it works, and how you can use our Keogh plan calculator to estimate your retirement income now or in the future.
What Is a Keogh Plan?
A Keogh plan is a tax-deferred retirement savings plan that allows self-employed individuals and small business owners to save for retirement. It is named after the legislation that created the Pension Reform Act of 1962, which Congressman Eugene Keogh introduced.
The Keogh plan offers several benefits over traditional retirement savings plans, including higher contribution limits and more flexibility in investment options. Additionally, contributions to a Keogh plan are tax-deductible, and the plan’s earnings grow tax-deferred. This means that taxes are only owed on the money when it is withdrawn during retirement.
Types of Keogh Plans
Two main types of Keogh plans are defined benefit plans and contribution plans.
Defined Benefit Plans
A defined benefit Keogh plan pays a fixed monthly benefit to the plan participant during retirement. The benefit is calculated based on the participant’s salary, years of service, and the plan’s investment performance.
For 2023 the maximum benefit was set at $265,000 or 100% of compensation (whichever is less).
Defined Contribution Plans
On the other hand, a defined contribution plan (also known as a money purchase Keogh plan) is a type of Keogh plan where the participant contributes a set amount to the plan each year. The benefit paid during retirement is based on the investment performance of the plan’s assets. The most common type of defined contribution plan is a profit-sharing plan.
For 2023, the maximum contribution limit for money purchase plans is 25% of your yearly compensation or $66,000, whichever amount is less.
How Does A Keogh Plan Work?
A Keogh plan allows the participant to make tax-deductible contributions to the plan each year. The contributions are then invested in various investment options, such as stocks, bonds, and mutual funds, to grow over time.
When the plan participant reaches retirement age, they can start withdrawing money from the plan, which is taxed as ordinary income. However, because the contributions were made on a tax-deductible basis, the participant will owe less in taxes overall.
Benefits of a Keogh Plan
- Tax-deferred growth: The money you contribute to a Keogh Plan is not taxed until you withdraw, which means you can enjoy more growth on your investment.
- Tax deductions: Contributions to a Keogh Plan are tax-deductible, which can help you reduce your taxable income and lower your tax bill.
- Flexibility: You can choose the type of Keogh Plan that best suits your needs and investment goals.
- Control: As the owner of a Keogh Plan, you have complete control over your investment decisions, allowing you to tailor your portfolio to meet your specific goals.
- Attractive returns: With a Keogh Plan, you can earn attractive returns on your investment, which can help you grow your retirement savings over time.
Keogh Plans Pros And Cons
The Keogh plan was created in 1962 by Congress, with Rep. Eugene Keogh leading the charge.
- Like other retirement accounts, the funds can be used beginning at age 59½ (without penalty), but they must all be taken out by 72.
- Although Keogh plans have higher operational costs and require more upkeep than Simplified Employee Pension (SEP) or 401(k) plans, the contribution limits per employee are much higher, making Keogh a popular choice for business owners who bring in high incomes.
Keogh Calculator
Using our Keogh plan calculator to estimate your retirement income utilizing an annuity, you can benefit from a guaranteed income for the rest of your life, even after the plan runs out of money. An annuity is an investment that provides a steady income stream, typically for the rest of the investor’s life. By choosing an annuity option for your Keogh retirement plan, you can have peace of mind knowing that you will have a guaranteed source of income in retirement, regardless of market conditions or the performance of your investments.
Note: You can purchase an annuity (with no tax penalties) with your Keogh pension plan, 401k, IRAs, retirement accounts, investments, and cash.
Keogh Withdrawal Comparison
Historically financial advisors recommend withdrawing 4% from your Keogh and adjusting for inflation. However, the 4% rule has been debunked as a safe withdrawal rate. New research concludes as low as 2.8% is the new rule. The following table compares rolling your retirement plan into a new annuity with withdrawing income or utilizing an advisor.
| Features | Annuity | Keogh | IRA | Roth IRA |
|---|---|---|---|---|
| Withdrawal Percentage | 5.20% – 6.55% | 4% | 4% | 4% |
| Can Income Increase? | Yes | Yes | Yes | Yes |
| Can Income Decrease? | No | Yes | Yes | Yes |
| How Long Will Money Last? | Lifetime | 30 Years+ | 30 Years+ | 30 Years+ |
| Annual Fees | 0 – 1.50% | 1% – 4% | 1% – 4% | 1% – 4% |
| Taxation | Taxable/Tax-Free | Taxable | Taxable | Tax-Free |
| Death Benefit | Account Balance | Account Balance | Account Balance | Account Balance |
Example: A 60-year-old retiree starts withdrawing immediately from their $1 million portfolio, they would receive:
Next Steps
A Keogh plan is a great way to save for retirement if you are self-employed or have a business. You can make annual tax-deductible contributions, and the IRS adjusts the dollar amount limit each year. However, as retirement age approaches, many people worry about how they will withdraw from their retirement savings plan. One option that can provide peace of mind is an annuity with a guaranteed lifetime withdrawal benefit (GLWB). Use our free Keogh calculator to estimate how much retirement income you can receive. Contact us for a quote today, and let us help you plan for a comfortable retirement.
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Who is eligible for a Keogh plan?
Self-employed individuals and small business owners are eligible for a Keogh plan.
What is the contribution limit for a Keogh plan?
The contribution limit for a Keogh plan varies depending on the type of plan and the individual’s income. For defined contribution plans, the contribution limit is generally the lesser of 25% of the participant’s compensation or $66,000 for 2023. The contribution limit is determined by a complex formula based on the participant’s age and compensation for defined benefit plans.
What’s the difference between a Keogh and 401k plan?
A Keogh plan is for self-employed individuals and small business owners. It offers more flexibility and higher contribution limits compared to a 401k plan employers offer for their employees and has pre-tax contributions and tax-free growth.
What’s the difference between an IRA and Keogh plan?
An IRA (Individual Retirement Account) is a retirement savings plan for individuals, while a Keogh plan is for self-employed individuals and small business owners. An IRA offers tax benefits for contributions and growth, while a Keogh offers higher contribution limits and investment options.
Can you have both a Keogh and a 401k?
No, you can not roll a Keogh into a 401k plan. However, you can roll a Keogh into a traditional IRA.
Can I convert a Keogh to a Roth IRA?
Yes, converting a Keogh plan into a Roth IRA is possible.
When can you withdraw from a Keogh?
You can withdraw from a Keogh plan at retirement age (59 1/2), subject to taxes and penalties.
Are withdrawals from a Keogh plan taxable?
Yes, withdrawals from a Keogh plan are taxed as ordinary income.
What is a critical difference between an ira and Keogh plan is:
IRA is for individuals; Keogh is for self-employed.
Do Keogh’s plans still exist?
Yes, Keogh plans, also known as HR-10 plans, still exist. They are tax-advantaged retirement savings plans for self-employed individuals and small business owners. Though less common today, with alternatives like SEP IRAs and Solo 401(k)s being more popular, Keogh plans can still be used and offer different contribution limits and options.
What is an example of a Keogh plan?
A Keogh plan is a retirement savings option for self-employed individuals or small business owners. An example would be a self-employed consultant setting up a Keogh plan to save for retirement, allowing for tax-deductible contributions. There are different Keogh plans, such as defined-benefit and defined-contribution plans, each with specific rules and limits.
What are the benefits of a Keogh plan?
A Keogh plan offers benefits such as higher contribution limits than other retirement plans, tax-deferred growth, and potential tax deductions for contributions. It provides flexibility in choosing between defined-benefit or defined-contribution structures, catering to different financial goals. However, it’s known for having more complexity and administrative requirements than other options.