A Keogh Plan, also known as an HR-10 plan, is a type of retirement savings plan for self-employed individuals or small business owners.
This plan is similar to a 401(k) plan. However, it has different rules and requirements. The plan is named after Eugene Keogh, a U.S. Congressman who sponsored the legislation that created this type of plan.
What is their purpose? Do they let you invest in gold? Find out in this detailed guide below:
Purpose of Keogh Plan:
The purpose of a Keogh Plan is to provide a retirement savings vehicle for self-employed individuals or small business owners.
Unlike employees who work for large companies and may have access to employer-sponsored retirement plans, self-employed individuals or small business owners are responsible for setting up their own retirement savings plans.
The Keogh Plan allows these individuals to save for retirement and receive tax benefits for doing so. By contributing to a Keogh Plan, self-employed individuals and small business owners can accumulate retirement savings. Also, they can use these savings in the future to support themselves in retirement.
Eligibility and Requirements for Keogh Plan:
Any self-employed individual or small business owner can establish a Keogh Plan. This includes sole proprietors, partnerships, and corporations. However, there are some eligibility requirements that must be met in order to establish a Keogh Plan:
The individual or business must have earned income from self-employment.
The individual or business must not have any employees or must have employees who are not eligible to participate in the plan.
The individual or business must make contributions to the plan on behalf of eligible participants.
The Contribution Limits and their Calculations:
The IRS determines the contribution limits for a Keogh Plan. Also, it can vary depending on the type of Keogh Plan and the participant’s age.
Defined Contribution Plans: For 2022, the maximum contribution limit for defined contribution plans, such as profit-sharing plans and money purchase pension plans, is $61,000, or 100% of the participant’s compensation, whichever is less. For participants who are over 50 years old, catch-up contributions of up to $6,500 are allowed.
Defined Benefit Plans: For defined benefit plans, the contribution limit is based on actuarial calculations and may be significantly higher than the contribution limit for defined contribution plans. The maximum annual benefit that can be paid from a defined benefit plan is the lesser of $230,000 or 100% of the participant’s average compensation for the highest three consecutive years of service.
The calculation of contribution limits can be complex. Also, it may involve actuarial calculations.
For defined benefit plans, the contribution limit is dependent on the actuarial present value of the participant’s projected retirement benefit.
For defined contribution plans, the contribution limit is dependent on the lesser of the contribution limit. The IRS determines this limit according to the participant’s contribution.
Furthermore, it is important to note that the contribution limit for a Keogh Plan is a combined limit that includes contributions made by the employer and the employee.
Types of a Keogh Plan:
There are three main types of Keogh Retirement Plans:
Profit Sharing Plan: It is a defined contribution plan. This plan allows an employer to contribute a portion of the company’s profits to the plan. Usually, the contributions go to the plan participants. This depends on a predetermined formula, such as salary or length of service.
Defined Benefit Plan: A Defined Benefit Plan is a type of retirement plan that provides a specific benefit to the plan participant at retirement, based on factors such as salary and length of service. The employer is responsible for funding the plan and assumes the investment risk. Defined Benefit Plans are generally more complex and expensive to administer than other types of retirement plans.
Money Purchase Plan: A Money Purchase Plan is another type of defined contribution plan that requires the employer to contribute a fixed percentage of each employee’s salary to the plan. Unlike a Profit Sharing Plan, there is no discretion in the amount of the contribution. The contributions are tax-deductible and grow tax-deferred until retirement.
It is important to note that Keogh Plans have specific rules and regulations that must be followed in order to receive the tax benefits associated with the plan. It is recommended that individuals and small business owners consult with a financial advisor or tax professional before establishing a Keogh Plan to ensure that they are in compliance with all applicable rules and regulations.
Benefits of a Keogh Plan:
One of the key benefits of a Keogh Plan is the tax benefits it provides. These include:
Tax-deductible contributions: Contributions made to a Keogh Plan are tax-deductible in the year they are made. This means that the amount of the contribution can be subtracted from the individual or business’s taxable income, which can result in a lower tax bill for the year.
Tax-deferred earnings: The earnings on investments made in a Keogh Plan are tax-deferred, which means that they are not subject to taxes until they are withdrawn. This can result in significant tax savings over time, as the earnings can accumulate and compound without being subject to taxes.
Taxes on withdrawals: Withdrawals from a Keogh Plan are subject to ordinary income tax. However, if the withdrawal is made after the participant reaches age 59 1/2, there is no penalty for early withdrawal. If the withdrawal is made before age 59 1/2, there may be a penalty of 10% in addition to ordinary income tax.
The tax benefits of a Keogh Plan can help individuals and small business owners save for retirement and reduce their tax liability. However, it is important to note that Keogh Plans have strict rules and regulations regarding contributions and withdrawals, and it is important to consult with a financial advisor or tax professional before making any decisions regarding a Keogh Plan.
Keogh Plan vs. Other Retirement Plans:
Keogh Plans are designed specifically for self-employed individuals and small business owners, and they have some key differences when compared to other retirement plans such as 401(k) plans and Individual Retirement Accounts (IRAs).
Here are some of the key differences:
Keogh Plans are only available to self-employed individuals and small business owners, whereas 401(k) plans are generally available to employees of larger companies. IRAs are available to individuals regardless of their employment status.
Keogh Plans generally have higher contribution limits than IRAs, but lower limits than 401(k) plans. Defined benefit Keogh Plans can have much higher contribution limits than either IRAs or 401(k) plans.
Keogh Plans generally require more administrative work than IRAs, as they must be established and maintained by the individual or business. 401(k) plans are typically established and managed by the employer.
Keogh Plans may not allow employees to make contributions to the plan, whereas 401(k) plans and IRAs both allow employees to make contributions.
Keogh Plans may have more limited investment options than 401(k) plans or IRAs, as they may not have access to the same investment options as larger employer-sponsored plans.
Keogh Plans offer unique benefits for self-employed individuals and small business owners, but they may not be the best option for everyone. It is important to carefully consider the benefits and drawbacks of each type of retirement plan before deciding which one is right for you.
What are the types of gold in which you can invest through a Keogh Plan?
Keogh plans have the capability to invest in the same instruments as 401(k) plans and traditional or Roth IRAs, including:
Individual Bonds (Corporate and Government)
Certificates of Deposit (CDs)
Exchange-Traded Funds (ETFs).
However, Keogh plans are not eligible to invest in tangible assets like precious metals bullion. Yet, there are alternative ways to gain exposure to gold or silver prices through assets such as stocks in mining or exploration companies, or by purchasing shares of a gold or silver ETF or index fund that invests in precious metals companies – often referred to as “paper gold” assets.
Advantages of the Keogh Plan:
There are several advantages to a Keogh Plan, including:
Higher contribution limits: Keogh Plans generally have higher contribution limits than other retirement plans, such as Individual Retirement Accounts (IRAs). This allows self-employed individuals and small business owners to save more for retirement and reduce their tax liability.
Flexible contributions: Keogh Plans offer flexible contribution options, which can be beneficial for small business owners with fluctuating incomes. Contributions can be adjusted each year to reflect changes in income and other factors.
Tax benefits: Keogh Plan contributions are tax-deductible, which means that they can reduce the individual or business’s taxable income. Additionally, earnings on investments made in a Keogh Plan are tax-deferred, which can result in significant tax savings over time.
Ability to customize the plan:Keogh Plans can be customized to meet the specific needs of the individual or business. There are several types of Keogh Plans, including defined contribution plans and defined benefit plans, which can be tailored to fit the unique circumstances of the business.
Retirement savings for self-employed individuals: Keogh Plans offer retirement savings options for self-employed individuals who may not have access to employer-sponsored retirement plans. This can be especially important for individuals who are not eligible for other retirement plans, such as 401(k) plans.
Keogh Plans offer several advantages for self-employed individuals and small business owners who are looking to save for retirement and reduce their tax liability. It is important to carefully consider the benefits and drawbacks of a Keogh Plan before deciding if it is the right choice for your individual or business needs.
Disadvantages of the Keogh Plan:
There are also some disadvantages to a Keogh Plan that individuals and small business owners should be aware of before deciding to establish one.
Complex administration: Keogh Plans can be complex to set up and administer. Also, it may require the assistance of a financial advisor or tax professional. This can add to the overall cost of the plan.
Limited investment options: Keogh Plans may have limited investment options compared to other retirement plans, such as 401(k) plans. This can limit your ability to diversify your investments.
Strict contribution requirements: Keogh Plans have strict contribution requirements that you must follow to avoid penalties and fees. This can make it difficult for people with fluctuating incomes to make consistent contributions.
Limited to self-employed individuals and small businesses: Keogh Plans are only available to self-employed individuals and small businesses, and may not be suitable for larger companies or individuals who are not self-employed.
Potential penalties for early withdrawals: Withdrawals from a Keogh Plan before age 59 1/2 may be subject to a 10% penalty in addition to ordinary income tax. This can discourage individuals from accessing their retirement savings early, even in cases of financial hardship.
While Keogh Plans offer several advantages for self-employed individuals and small businesses, they may not be the best option for everyone. It is important to carefully consider the advantages and disadvantages of a Keogh Plan before deciding if it is the right choice for your individual or business needs.
Steps to Establishing a Keogh Plan:
Setting up a Keogh Plan can be a complex process. So I recommend that individuals and small business owners consult with a financial advisor or tax professional. Still, here are the basic steps you need to take to set up this plan:
Determine eligibility: Determine whether you or your small business is eligible to establish a Keogh Plan. This depends on multiple factors such as your self-employment income or the number of your employees.
Choose a plan type: Decide which type of Keogh Plan is best for your individual or business needs. It could be a defined benefit plan or a defined contribution plan.
Select a financial institution: Choose a financial institution to act as the plan’s trustee. This may be a bank or investment firm. They will manage your plan’s investments.
Draft plan documents: Work with a financial advisor or tax professional to draft the plan documents. It will outline the plan’s rules, investment options, and contribution requirements.
File plan documents with the IRS: File the plan documents with the IRS to receive a tax identification number for the plan. Also, ensure that the plan is in compliance with all applicable rules and regulations.
Set up a plan administration system: Establish a system for administering the plan, such as a payroll service or accounting software, to ensure that contributions are made on time and in compliance with the plan’s requirements.
Required documentation and paperwork for setting up a Keogh Plan can include the plan document, trust agreement, and employee disclosures. The IRS also requires annual reporting of the plan’s activity as well. This includes contributions and investment earnings.
So, a Keogh Plan is a tax-deferred retirement plan for self-employed individuals and small business owners. The plan offers tax benefits, contribution limits, and investment options. They make it an important tool for retirement planning.
Also, a Keogh Plan can be an important tool for retirement planning for self-employed individuals and small business owners. That’s because it provides them with the opportunity to save a significant amount of money on a tax-deferred basis for their retirement years.
I suggest consulting with an expert for more information on Keogh’s plans. However, if you’re a serious investor who wants to save your fortune, I suggest going with a gold IRA.
Gold IRAs have become increasingly popular because they allow investors to safeguard against inflation.