Retirement: A Keogh for the
self employed
Keoghs are tax-deferred
retirement plans for self-employed individuals and their employees. In
general, it works like and offers many of the same tax advantages as
other retirement plans. They have the bonus of higher contribution
limits than IRAs--and a larger potential tax benefit. You may be able to
contribute as much as $40,000 per year. In most cases, you'll be able to
deduct contributions to your Keogh from your taxable self-employment
income each year. In addition, you may be able to deduct contributions
you make on behalf of employees who don't have an ownership interest in
your business. Anyone with self employed income qualifies to enroll in a
"Keogh" plan. They are, specifically, for self employed persons.
Usually doctors, lawyers, and other self employed professionals are
chiefly among the Keogh participants.
Although the term Keogh Plan is no longer a term used
by the IRS or ERISA, it is still in common usage and can still be found
in current government publications. The Keogh Plan is also referred to
as an HR 10 Plan, and can only be established by an
employer. A sole proprietor or a partnership can set one up but an
individual partner cannot. Keoghs must be for the exclusive benefit of
employees or their beneficiaries. Since it includes coverage for a
self-employed individual, in this instance, the self-employed individual
is both an employer and an employee.
Contributions:
Keogh participants are allowed to
contribute 25 % of "after Keogh deduction" income or $30,000 whichever
is less. (Here the IRS goes again) The effective maximum
contribution rate is 20%. The formula follows below:
Net Earnings: $150,000
Keogh Contribution: $ 30,000 (effective 20% rate)
---------
After Keogh Earnings $120,000
The contribution is 25% of the "after
Keogh deduction" net earnings of $120,000.
Eligible
Employees -
Any employee who is working full time
(over 1000 hours per year) and has completed at least one years of
service, must be included in the Keogh plan at the same rate as the
employer. Only the first $150,000 of employer income is used to compute
the average.
Withdrawals -
The rules for Keogh withdrawals
are the same as those for IRAs. Withdrawals cannot begin without
penalty before the age of 59 1/2. Similarly, withdrawals must begin by April 1 after the year
the participant turns 70 1/2.
Penalties -
The penalties for early
withdrawal are again, the same as for IRAs. The withdrawal is taxed at
the participants current tax rate, plus a "penalty" of 10% .
Permitted Investments -
All IRA investments
are permitted with one notable addition. Keogh plans allow cash value
life insurance plans to be considered as an investment; IRAs do not.
<<-- Back to
Table of
Contents for Retirement
When I hear about people making vast fortunes
without doing any productive work
or contributing anything to society,
my reaction is, How do I get in on that?
-- Dave Barry --
Table of
Contents:
-
What Are Retirement Accounts?
-
Employer Based
Retirement Plans
-
401(k) Plans
-
Individual Retirement Accounts (IRAs)
-
Roth IRA
-
What is a Rollover IRA?
-
Converting and
Recharacterizing of an IRA
-
Education IRA & SEP IRA
-
Self Employed Retirement plan: Keogh
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