Pros and Cons to a Keogh Plan

A Keogh plan is a type of retirement plan that was enacted in 1962. This type of retirement plan carries with it several advantages and disadvantages for retirement savers. Here are some of the pros and cons of a Keogh plan.

Pros

One of the big advantages of this type of retirement plan is that individuals can contribute a higher amount of money than they could with other types of retirement plans that are available. With this type of retirement plan, you can contribute as much as $49,000 per year. This is more than an IRA and several of the other types of retirement accounts allow. If you are an individual that earns a large income, this type of plan will allow you to set aside a big portion of it for retirement.

Another advantage of this type of plan is that the contributions are tax deductible. This can allow you to significantly decrease the amount of income that you have to pay taxes on every year. In addition to that, you can set aside more money for retirement savings than you could without the tax deductibility feature. This allows you to invest more money into the financial markets and earn greater returns.

With this type of retirement plan, you will have all of the same investment options that you would with a traditional 401k or IRA. You can invest in stocks, bonds, mutual funds, annuities and several other types of securities. This allows you some great flexibility in your investments and allows you to find something that you are comfortable putting your money into.

Cons

Even though this type of investment can be beneficial, there are a few potential drawbacks associated with it. For one thing, you have to be a self-employed individual in order to start one of these plans. If you are an employee, you are not going to be able to access the Keogh plan. However, if you are an employee and you have another source of self-employment income, you could still open a Keogh plan. 

Another disadvantage of this type of plan is that you will not have access to your money until you reach retirement age. According to the laws, you cannot get the money out of your account until you reach the age of 59 1/2. If you try to take out your money before the age of 59 1/2, you are going to have to pay an early distribution penalty of 10 percent of the amount that you withdraw. In addition to paying an early distribution penalty, you will have to count the money as if it were regular income. This means that you will also have to pay taxes on the amount that you take out at your regular marginal tax rate. If you are in the highest tax bracket, this could mean that you are going to pay taxes of 35 percent on the amount that you withdraw. 

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