What Is a Keogh Retirement Plan?

A Keogh plan is a type of retirement plan reserved for those that are self-employed or part of an unincorporated business. Here are the basics of the Keogh retirement plan.

Keogh Plan

This is also sometimes referred to as an HR(10) plan. This type of plan is essentially a pension plan that allows you to save on a tax-deferred basis. You can set up your Keogh plan to be a defined contribution pension plan or a defined benefit pension plan. With this type of retirement plan, you can set aside as much as 25 percent of your annual income.

Types of Plans

There are three main types of Keogh plans that are available. You could set your Keogh plan up as a profit sharing plan, a defined benefit plan or a money-purchase plan.

Compared to an SEP

This type of plan is similar to an SEP (simplified employee pension) plan. The Keogh plan typically requires more maintenance and administration costs than an SEP. However, with the Keogh plan, you can contribute more of your money to the plan each year.

Accessing the Plan

In order to access the money in your plan, you will need to wait until you reach the age of 59 1/2. You will also need to start taking distributions by the time you reach 70 1/2. 

Is there a Keogh plan early withdrawal penalty?

If you contribute to a Keogh plan, you may be interested in taking money out before you reach retirement age. However, if you are under 59 1/2 years old, you cannot take money out of your Keogh account without incurring an early withdrawal penalty. Currently, in 2010, you have to pay a 10 percent penalty on the amount of money that you take out. In addition to that, you will have to treat the money as if it were regular income and pay taxes on it.

What are the Keogh plan contribution limits?

You can contribute money to a Keogh plan on a tax-deferred basis. As of 2010, you can contribute a maximum of $49,000 per year to the plan without penalty. However, the amount of money that you can contribute is also based on a certain percentage of your total annual income. The maximum amount of money that you can contribute is 25 percent of your annual salary. This means that you cannot contribute as much as $49,000 if you do not make enough money to avoid exceeding the 25 percent threshold for this amount.

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