What Is a Keogh Plan?

A Keogh plan is a high-contribution retirement plan for the self-employed—but it comes at a steep cost.

Written by Devon Delfino / July 25, 2022

Quick Bites

  • Keogh plans are retirement plans for those among us who are self-employed, though they do exclude independent contractors.
  • Keogh plans work similarly to 401(k)s, though they are becoming less popular nowadays.
  • You can contribute much more to a Keogh plan than to something like an IRA, but it can be expensive to maintain.

A Keogh plan, also known as a qualified retirement plan or H.R. 10 plan, is a type of retirement plan for the self-employed, as well as select employees at private businesses. It gets its name from the representative who introduced the legislation which created the plan, Eugene Keogh.[1]

“A Keogh plan…can be set up as either defined benefit or defined contribution plans,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Mich. “They are set up as retirement plans with a custodian that supports them, like Schwab or Fidelity.”

Although these plans aren’t as common as they used to be, you may still see the name pop up from time to time if you’re self-employed.[2] Here’s what else you should know about these plans.

Inside this article

  1. How does a Keogh plan work?
  2. Types of Keogh plans
  3. Pros and cons of Keogh plans
  4. Keogh vs. IRA

How does a Keogh plan work?

Keogh plans work similarly to 401(k)s, just for the self-employed. For example, if you’re eligible for the plan, you’d be able to make monthly contributions to the account, which could then be invested so it could build value over time. That money would also grow on a tax-deferred basis. You’d be able to deduct contributions from your taxable income now, but you’d have to pay taxes on that cash once you start withdrawing money in retirement.

Also with a 401(k), you’d be able to start taking money out of your Keogh plan (penalty-free) at age 59 ½. Those who withdraw funds before then would face a 10% penalty, plus income tax. Keogh plans require you to take distributions by the time you’re 70 ½.[3]

It’s also important to note that you can’t get a Keogh plan if you’re an independent contractor according to the IRS—even though you consider yourself to be self-employed. Instead, you’d have to have an unincorporated business (or work for one) to qualify.[2]

“[Keogh plans] have a contribution limit of 25% of your compensation, up to a maximum of $61,000 in 2022, if set up as a money purchase plan. However, if it is set up as a profit-sharing plan, then the limit is 100% of your compensation, up to the $61,000 maximum,” says Milan. Those contributions are based on your net earnings.[4]

Ultimately, some of the ways your Keogh plan would function will depend on the type of plan you get.

Types of Keogh plans

Keogh plans come in two forms:

Qualified Defined-Benefit Plans (QDBPs): This means you’d be able to receive a set, defined amount of money in retirement, like a pension, which would be based on your fixed contributions. That may be, for example, 5% of your income. Sometimes, QDBP’s are set up as a profit-sharing option.

Qualified Defined-Contribution Plans (QDCPs): This means you’d have a fixed contribution amount that you’d put into your Keogh plan each month or year. These are much more complex to set up, though you’d still be putting a percentage of your income into the plan. The difference is that the amount you contribute is based on a formula from the IRS.[2]

Pros and cons of Keogh plans

Pros

  • High contribution limits

  • Available to self-employed individuals

Cons

  • Expensive and difficult to maintain

  • Not available to traditional employees

  • Excludes independent contractors

Keogh vs. IRA: What's the difference?

An individual retirement account (IRA) is another option for those who are self-employed. They come in multiple forms including traditional, Roth and SEP. However, unlike a Keogh plan, IRAs are also available to those who have an employer-sponsored plan like a 401(k), provided they meet the requirements.[5] So there’s a bit more flexibility there.

That said, IRAs do have lower contribution limits than Keoghs: You can contribute up to $6,000 per year to a traditional or Roth IRA as of 2022 (or $7,000 if you’re 50 or older).[6] So if you’re making hundreds of thousands of dollars per year, you’d probably want a much higher contribution limit, especially if you want to maintain your current lifestyle in retirement. But those making less than $50,000 per year probably wouldn’t be able to get much extra use out of the Keogh plan’s higher limits. Either way, it’s also important to consider how those contributions are able to grow, minus any maintenance or fees.

“In my opinion, there really wouldn’t be much of a reason to choose a Keogh plan over an SEP IRA, as the latter are simpler to maintain, cost less and, if set up correctly, provide the same benefits,” says Milan.

Article Sources
  1. “Keogh plan.” Legal Information Institute. March 2022. https://www.law.cornell.edu/wex/keogh_plan.
  2. “Keogh plan.” Corporate Finance Institute. Apr. 29, 2020. https://corporatefinanceinstitute.com/resources/knowledge/other/keogh-plan/.
  3. “Your Guide to Keogh Plans and How They Work.” SoFi. Feb. 17, 2022. https://www.sofi.com/learn/content/what-are-keogh-plans/.
  4. “KEOGH PLANS.” Franklin Mint and Federal Credit Union. http://learning.fmfcu.org/page.php?b=24543250-0&c=1057.
  5. “IRA FAQs.” Internal Revenue Service. Jan. 3, 2022. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras.
  6. “Traditional and Roth IRAs.” Internal Revenue Service. Nov. 5, 2021. https://www.irs.gov/retirement-plans/traditional-and-roth-iras.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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