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A Keogh plan is a tax-deferred retirement savings plan for people who are self-employed, and is much like an individual retirement account (IRA). The main difference between a Keogh and an IRA is the contribution limit, with Keogh plans allowing significantly more contributions than IRAs.
Almost any investment, except physical real estate and collectibles, can be used for a Keogh account. Typically, people place Keogh assets in stocks, bonds, money-market funds, certificates of deposit, mutual funds, or limited partnerships.
Contributions to Keogh Plans
Contributions to Keogh plans can be made on a before-tax basis and grow on a tax-deferred basis until withdrawn at retirement. The amount that you can contribute depends on whether you are participating in other retirement plans.
If you’re self employed and the Keogh account is your only retirement plan, then your contribution limit is $46,000 (Indexed) or 100% of eligible compensation, whichever is less for the tax year 2008. The maximum deductible contribution is limited to 25% of your eligible compensation.
If you participate in both a 403b plan and a Keogh plan then the contributions made to both plans cannot exceed $46,000 or 100% of eligible compensation, whichever is less for the tax year 2008.
If you participate in both a qualified plan and a Keogh then the contribution limits for each plan are calculated separately. The maximum allowable contribution to each plan is $46,000 or 100% of eligible compensation, whichever is less for the tax year 2008. This means your potential contribution can be as high as $92,000 in 2008.
When are Contributions to Keogh Plans Vested?
A Keogh plan must allow you to vest (or own the contributions) in one of three ways: 20% vested after 3 years of service and an additional 20% for each additional year of service (making you 100% vested within 7 years); no vested interest until after 5 years of service and then you are 100% vested (this method of vesting is known as “cliff vesting”). This is the minimum vesting schedule; your employer has the freedom to choose a faster vesting program.
Withdrawals from Keogh Plans
Withdrawals from Keogh accounts are taxed as ordinary income. Participants in Keogh plans are subject to the same restrictions on withdrawal as IRAs. Withdrawals cannot be made without a penalty before age 59 ½, and distributions must begin before age 70 ½. Withdrawals made prior to age 59 ½ are subject to the same 10% penalty that is imposed on withdrawals from IRAs before age 59 ½.
Borrowing from Keogh Plans
If you are self-employed then you generally cannot borrow money from the Keogh plan unless you are a shareholder in a Subchapter S corporation. Employees are generally permitted to borrow from the Keogh plan, unless restricted by the particular plan requirements. Employees can borrow up to half of their vested balance, up to $50,000, which must be repaid over payroll deductions over five years.
Advantages and Disadvantages of Keogh Plans
- Contributions, within limits, are deducted from gross income
- Tax is deferred until the funds are withdrawn
- Interest generated within the plan is tax deferred until withdrawn
- Contribution limits are more liberal than IRAs
Disadvantages to a Keogh plan:
- The Keogh plan involves all the costs and complexities associated with qualified plans
- The same early withdrawal penalties of other qualified plans apply to Keogh plans
- If the participant is a more then 5 percent owner, payments must begin by April 1 of the year after reaching 70 ½ whether or not the participant has retired
Questions for Your Attorney
- Can I withdraw funds from my Keogh if I have an emergency?
- How can a Keogh plan restrict how much I can borrow from the plan?
- Is there any benefit to making non-deductible contributions to the Keogh plan?