One of the most difficult things about being self-employed is contributing to a retirement plan. You know you need one, but it can be difficult when you are the boss, and you do not belong to a company and have no structured retirement plan. You can remedy this with a Keogh retirement plan. While I am a fan of the Roth IRA, I also do not have any employees. The fact of the matter is that you might want to provide an overall retirement plan for your business, including your employees. This is where the Keogh retirement plan comes in. It is a way for you to contribute to a retirement plan while providing one for your employees. This usually works best for those who are self-employed and have a rather small number of employees working for them.
Keogh retirement plan basics
A Keogh retirement plan is also referred to as an HR 10 plan. You have to earn self-employment income through the performance of personal services to be eligible for a Keogh retirement plan. You do not have to have employees to establish a Keogh retirement plan. Sole proprietorships are eligible, but you should check carefully with the IRS or a tax expert to find out the special rules that apply to these situations. Even if you are employed elsewhere and run your own business on the side, you can still set up a Keogh retirement plan. A Keogh plan is for only one business at a time. If you have more than one business, you have to set up a Keogh plan for each of those if you want to provide this as a retirement account plan for you and your employees. As with other retirement plans, you will have to be 59 1/2 in order to withdraw money from your retirement account (although you don´t have to take money out then). Required distributions begin when you reach 70 1/2.
Advantages of the Keogh retirement plan
- Contributions are pre-tax, lowering your taxable income
- Earnings grow tax-deferred until you withdraw them
- Special 10-year averaging is possible on some lump sum benefits
- You have more liberal contribution limits than with an IRA
Disadvantages of a Keogh retirement plan
- A qualified plan comes with complexities and costs, and a Keogh plan is one of these
- Early withdrawal penalties can be steep
- If you have not retired by 70 1/2, the penalty for not taking distributions is quite hefty
Types of Keogh retirement plans
- Profit sharing
- Money purchase
Each of these is considered a qualified defined benefits or a qualified defined contribution retirement plan.
Of course, it is possible to set up a 401(k) or an IRA for yourself as a self-employed person. However, many self-employed persons find a Keogh plan less expensive and more flexible when other employees are involved. You can check IRS Publication 560 for updated information on Keogh retirement plans, as well as other retirement plan options for the self-employed.