Updated July 17, 2023
Introduction of Keogh Plan
Keogh Plan is a retirement plan formulated for the benefit of employees of non-corporate entities such as sole proprietors, self-employed persons, an association of persons, the body of individuals, partnership firms, or any other unincorporated persons through investment in the secured securities and through a selection of appropriate plan according to the requirement of the non-corporate entity.
Explanation
- Keogh Plan is a retirement account of an individual person.
- For employees of big corporates & government departments, there many retirement plans in place. The issue arises only for employees of a smaller organization.
- Hence, Keogh Plan is made for employees of smaller organizations that can invest in funds of plans.
- This plan is established in 1962 by Congress. The hard-working employees of small organizations such as self-employed persons, a body of individuals, partnership firms, etc. are benefited out of these plans.
- The plans serve the purpose of gaining higher to earn higher after retirement.
- However, the fame of this plan is at still at a lower stage due to other famous plans in place such 401(k) plan.
How Does It Work?
- First, you need to be eligible for the plan to work.
- Once the eligibility conditions are met, you are allowed to open an account under the plan.
- After the successful opening of an account, you need to select the type of plan you wish for. After such a selection, you can initiate making contributions in such a plan.
- Every year you make a contribution, you are allowed to withdraw the amount from the plan only the attaining the age of more than 59 years. Such contributions are not taxable. But what if a person is need to withdraw before such age? Well, in that case, you are allowed to withdraw only after paying the penalty. However, in genuine exceptional circumstances, the penalty is not levied even if the funds are withdrawn prematurely.
- The plan assets are invested in various financial instruments by the fund. Thus, the money grows within the plan assets.
- One should note that for the purpose of claiming the deduction, you need to contribute before hand i.e. up to the due date of filing tax return for the concerned fiscal year.
Types of Keogh Plan
Basically, there are two Keogh Plans namely, the Defined Contribution Plan & the Defined Benefit Plan. We will discuss each of the plan as follows:
1. Defined Contribution Plan
- Under the defined contributions plans of the Keogh plan, they are two sub-types of this plan. One is a profit-sharing plan & the other is a money-purchase plan.
- Under the profit-sharing type of contribution plan, you will contribution a certain amount each year as per your discretion. However, there is a limit on the amount you can contribute each year. The maximum allowed contribution is an upper cap (i.e. $ 56000 for the year 2019) or 25% of total compensation, whichever is less.
- Under the money-purchase type of contribution plan, you will contribute a certain amount each but not at your discretion. Here, the limit is dependent on the revenue generated from the business. Under this plan, you to declare the amount of contribution you will make each year. In case of failure of contribute the said amount, you may face penalties for non-compliance.
2. Defined Benefits Plan
- You need to establish the fund & fund it as per your capacity to invest in a specific tenure.
- You need to first decide the annual you need at the time of retirement. On the basis of such a goal, you will invest the present values every year. The contribution is dependent on various factors such as the expected return from the fund, the expected age of retirement, the quantum of income, income patterns during the tenure, etc.
- Is there any contribution limit for the defined benefit plan under the Keogh Plan? The answer is no! there is no limit on contributions as off now. The limits are only applicable on the quantum of per annum you want after the requirement.
- At present for 2019, the maximum limit set of $ 225000 per annum.
Who is Eligble for Keogh Plan?
- As said earlier, this plan is made for small business organizations. Hence, self-employed persons, an association of person, a body of individuals, partnership firms, sole proprietors, or other non-corporate entities are eligible for keogh plan. One should note that a freelancer or an independent contractor is not allowed to formulate such a plan. Also, only one member of the partnership is not allowed to formulate such a plan.
- Only those employees who has been under the employment of the business for at least 2 previous years & having worked for at least 1000 hours per annum are eligible for these plans.
Advantages
Some of the advantages are given below:
- The plans are approved.
- Approved plans carry a sense of confidence over the contributions made by the personnel.
- Approved plans provide the satisfaction of investment to the investor.
- Similar options available under the traditional 401(k) plan are also available here such as investment in mutual funds, bonds, annuities, etc.
- The basic benefit of retirement is also served here with the ease of flexibility on the contributions.
- The best advantage of this plan is that higher contributions are allowed as compared to traditional retirement plans.
- Also, the tax authorities will not tax you on such contributions i.e. allowed for taxation purpose.
- The benefit is flowed to the professionals. The small business organizations are captured here.
Disadvantages
Some of the disadvantages are given below:
- The basic eligibility for this plan is that it is applicable only for a small business organization. Thus, to capture the benefits of this plan, you need to be self-employed. Self-employment is linked to paying your own health insurance & social security fees.
- The investments generate higher returns & thus these plans are still exposed to a certain amount of risk.
- The penalty is payable in case a person needs to withdraw before the specified age.
- Due to penalty, the hard-owned money gets a hit when you utterly need the funds for disposal.
- The cost of management of the plan is also higher due to many factors including legal compliances for the plan.
Conclusion
So as to summarise the above discussion, the Keogh Plan is basically a plan made from a tax-advantaged perspective. It made especially for small business owners. The plans are reliable for investments. Now or later you will need a retirement plan in place for the betterment of old-age time when you have of energy to work for survival needs.
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