What Is a Keogh Plan?

What You Need to Know About Keogh Plans

Definition

A Keogh (KEY-oh) plan is a type of retirement plan for the self-employed or unincorporated businesses. This type of plan is now called an "HR-10" or "qualified retirement plan."

Financial advisor explaining a Keogh retirement plan with client in the client's home.
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Definition and Example of a Keogh Plan

A Keogh plan is a tax-deferred retirement plan for self-employed people and unincorporated businesses. Keogh plans get their name from U.S. Representative Eugene Keogh of New York State, who was key in enacting the Self-Employed Individuals Tax Retirement Act of 1962. Because of his efforts, the legislation became known as the Keogh Act.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) removed the distinction between Keoghs and other plans. Therefore, the Internal Revenue Code no longer refers to these plans as "Keoghs." Instead, Keoghs are now known as "HR-10s" or "qualified retirement plans."

A Keogh is similar to a 401(k), but the annual contribution limits are higher. There is also much more to administering these plans than other types.

Self-employed people have other options that can be used that are not as costly to maintain. Some examples are the Simplified Employee Pensions (SEP-IRAs) or individual or solo 401(k)s. You could also choose a Savings Incentive Match Plans for Employees (SIMPLE) for your business.

  • Alternate name: HR-10, qualified plan

Note

Keoghs can be used by small businesses set up as limited liability companies (LLCs), sole proprietorships, or partnerships.

For example, a sole proprietor can establish a Keogh or HR-10 retirement plan in which an amount is contributed each year toward the business owner's retirement savings. Suppose the owner decides to contribute a fixed amount of $20,000 per year to the plan. In turn, the funds are invested in mutual funds containing a basket of stocks or bonds. In retirement, the owner can withdraw funds as needed.

How Do Keogh Plans Work?

There are two types of Keogh plans available: a defined contribution plan and a defined benefit plan.

Defined Contribution Plans

In a defined contribution plan, you define how much you'll place into the fund each year. There are two ways to define the amount: profit-sharing (your business is the only one that pays into it) or money purchasing (you contribute a fixed amount of your income every year into the plan).

Using a profit-sharing option, you can contribute up to $61,000 in 2022 ($58,000 in 2021) or up to 100% of your compensation to your plan, whichever is less. The amount you choose to contribute to a profit-sharing plan can change each year.

Note

You can deduct 25% of the contributions you make for your employees or yourself if you're self-employed.

A money-purchase plan lets you decide at the outset how much of your profits you can place in a Keogh. The contribution limit is fixed and can't be changed. Limits for the money-purchase plan are the same as for profit-sharing: $61,000 in 2022 ($58,000 in 2021) or 100% of compensation, whichever is less.

Defined Benefit Plans

Defined benefit plans work like normal pension plans: you set a pension goal for yourself, and you fund it. Your annual benefit cannot exceed 100% of your average compensation over your three highest consecutive calendar years or $245,000 for 2022 ($230,000 for 2021), whichever is less.

You make contributions to each type of plan on a pre-tax basis. You also pay taxes each pay period on less and have the option of taking an upfront deduction on your income tax return.

Investing in a Keogh

As with a 401(k), you can defer taxes on the money you invest in a Keogh until retirement. You can begin taking distributions at age 59 1/2 but no later than April 1 of the year after you reach 72.

Withdrawals made before that time are taxed federally. They may even be taxed by the state you live in. You might pay a 10% penalty for early distributions unless certain exceptions apply.

Note

You can invest the money in a Keogh plan in stocks, bonds, mutual funds, or other investments.

You have to establish your qualified retirement plan before the end of the year you wish to receive the deduction, but you can make contributions for the prior year before you file your tax return by mid-April. If you file a tax extension, you have until mid-October.

Keogh Plan vs. 401(k)

Keogh vs. 401(k)
Keogh 401(k)
Contributions can be made any time before filing taxes Contributions must be made by December 31
Contributions based on actuarial assumptions; annual benefit up to $245,000 in 2022 or 100% of highest annual income, whichever less Can contribute up to $19,500 in 2021 ($20,500 in 2022) and an additional $6,500 per year if over age 50
Rigorous reporting Simplified reporting
Taxes deferred on earnings until distributions are taken Post-tax (Roth) contributions allowed
No loans allowed Can take out a loan on the balance
Employer and employee contributions Employer and employee contributions

Key Takeaways

  • A Keogh plan is a type of retirement savings option for self-employed people.
  • Keogh plans were created in 1962 but are now called HR-10s or qualified plans by the IRS.
  • Keoghs can be defined benefit or defined contribution plans.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 2.

  2. U.S. General Accounting Office. "IRS Needs to Curb Excessive Deductions," Page 2.

  3. Congress.gov. "H.R.1836 - Economic Growth and Tax Relief Reconciliation Act of 2001."

  4. Internal Revenue Service. "Retirement Plans for Self-Employed People."

  5. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 12.

  6. Internal Revenue Service. "Choosing a Retirement Plan: Profit-Sharing Plan."

  7. U.S. Department of Labor Employee Benefits Security Administration. "Profit Sharing Plans for Small Businesses," Page 4.

  8. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 3.

  9. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), Etc.," Page 1.

  10. Internal Revenue Service. "Retirement Topics - Defined Benefit Plan Benefit Limits."

  11. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Pages 18, 20.

  12. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Pages 14-15.

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