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Keogh retirement plan

A Keogh plan is a tax-deferred retirement plan designed for workers or partners with self-employment income. Currently, Keoghs are for self-employed individuals or partners, including sole proprietors who file Schedule C or a partnership whose members file Schedule E.

There are two different types of Keogh plans, the profit sharing and the money purchase plan. Under Keogh regulations, the Money Purchase contribution is mandatory; you must make the same percentage contribution each year, whether you have profits or not. The Profit Sharing contribution can change each year. Individuals can contribute to both types of plans in the same year.

The most attractive feature of Keoghs is the high maximum contribution they allow. Pre-tax contributions are made by the self-employed person, and contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.In addition, you retain the opportunity to invest in regular IRAs.

Contributions to a Keogh can be made for the tax year from January 1 of that year until April 15 of the next year. However, the Keogh account must be opened by December 31 of the tax year for which the deduction is to be claimed.

  • Money-purchase plans contributions are limited to the lesser of $40,000 or 25% of your self-employment income.
  • Profit-sharing keogh contributions can vary in a given year from 0% - 20% of new business income with a maximum contribution of $40,000.