What is a Keogh Plan?
A Keogh Plan is a type of qualified retirement plan. Their primary advantage is very high tax-deferred contribution limits (up to $265k), but they are also more challenging to set up and administer.
I was reading a financial book recently when I came across a reference to a type of retirement plan that I’d never heard of before.
It was called a Keogh Plan.
Pronounced, “Kee-Oh”.
As it turns out, there are a couple of good reasons I’ve not heard of a Keogh Plan before.
First, there aren’t many people that use them, which we’ll explain further in a bit
Second, even when people refer to a Keogh Plan they rarely call it a Keogh plan.
Sort of like people in the South call facial tissue, “Kleenex” and how we call all sodas, “Cokes”.
It really is just a semantic substitution for a type of qualified retirement plan for self-employed individuals.
But, it’s not technically that simple either.
Let’s dive into the details and explain why.
The Nuts & Bolts of Keogh Plans
Put succinctly, a Keogh Plan is a retirement plan for self-employed individuals, like a Solo-401(k) or SEP IRA.
They were created as a part of the Self-Employed Individuals Tax Retirement Act of 1962 which was written in large part by the honorable Eugene Keogh, a congressman from New York.
Originally, Keogh Plans also included small businesses with a relatively low number of employees who could also be covered by these qualified retirement options.
However, over time, as other more cost-effective plan options presented themselves for small businesses with multiple employees, the term “Keogh” came to define self-employed individuals only.
The name Keogh is hardly even used at all these days and in many cases may be substituted entirely for the term “HR-10” plan.
Keogh Plans can be established as defined contribution or defined benefit plans and contributions receive special tax treatment up to a certain level of income which the IRS changes annually.
As a defined benefit plan, the plan can be established as a profit-sharing plan or a money purchase plan. Money purchase plans require a fixed percentage of income to be contributed to the plan annually.
Funds in Keogh Plans can be invested in securities like 401(k)s and IRAs and the plans are subject to required minimum distributions (RMDs) beginning at age 72 to 75 depending on your birth year.
The Keogh Differences
So, what’s the difference between a Keogh and a Solo-401(k) or SEP IRA?
To begin, Keogh’s can only be established by self-employed or non-incorporated businesses.
But the primary difference in Keogh Plans is the maximum contribution limit.
Individuals can contribute the lesser of $66,000 (in 2023) or 20% of individual gross income into the plan annually as a defined contribution plan.
However, if you elect to set up the Keogh as a defined benefit plan, you can contribute as much as $265,000 (in 2023) or 100% of your income.
That’s a bunch of money in a tax-advantaged retirement account. More than any other that I’m aware of.
But who could afford to put over one-quarter-of-a-million dollars into a retirement plan each year?
Well, I can think of two types of people:
- Folks that have way more income than I do; and
- I don’t know…doctors? Lawyers? Other high-income, self-employed people.
I get that there aren’t many of us who play retirement-saving chess at this level, but for those that do, this is potentially a really big deal.
Who knows? Maybe one day you’ll be glad you read this or maybe you’re wealthy now and you’re glad you found it today (we do accept gifts of appreciation by the way).
Other benefits of Keogh plans include:
- More time to make contributions (12/31 vs Tax Day in April).
- Even though you can contribute up to $66k to a 401(k), only the first $22.5 is tax-deferred. All Keogh contributions can be made as qualified contributions.
- Self-employed profit-sharing contributions can be deducted up to 25% of the compensation paid during the tax year.
Here’s a table to summarize the differences.
| 401(k) Plan | Keogh Plan |
Tax Treatment | Tax-Deferred or Roth | Tax-Deferred Only |
Max Qualified Contribution | $22,500 in 2023 plus $7,500 per if 50+ | $265,000 in 2023 for defined benefit plan; $66,000 for defined contribution plan |
Contribution Deadline | Contributions must be made by December 31 | Contributions must be made before tax filing (tax day) |
Administrative Headache | Low level of difficulty | Much more trouble than a Solo 401(k) |
Now, I’m not a tax professional, but from what I’ve read, the Keogh plan will require a heavier lift on paperwork and tax filing.
That’s when you’ll be happy to have a giant income and the ability to pay someone else to handle this for you.
Some Other FAQs:
Can I contribute to a 401(k) AND a Keogh Plan?
Who are you, Warren Buffett?
No, you can’t max out both plans, but if you have employment income with an employer you could max out your employer match, then fill the gap up to the annual $66k max in your own Keogh Plan.
Of course, you could just as well defer your employee income into your employer-sponsored plan and live off your self-employment income, but anything over $22,500 in the 401(k) won’t be tax-deferred.
Should I Use a Solo 401(k) or a Keogh Plan?
If you have your heart set on building your own defined benefit plan, then a Keogh is for you.
However, if you are planning to use either account as a defined contribution plan, then you need to consider whether or not the higher contribution limit in the Keogh is worth the paperwork headache and the commitment to putting income into the account.
If you are in the 32% marginal tax bracket and went with the Keogh, you could potentially save another $13,920 ($66k – $22.5k*.32) from taxes each year. Or at least defer them until later in life.
Also, keep in mind that if you’re married, you basically get double the space for Solo 401(k) contributions.
Can I Borrow from a Keogh Plan?
Nope, but why would you need to? If you bothered to set up a Keogh, you probably have lots of income to defer and to use instead of debt.
Can I Contribute to an IRA AND a Keogh Plan?
Technically, yes. However, deductible IRA contributions are subject to restrictions based on your modified adjusted gross income and access to another plan through your job.
Your MAGI is probably pretty high if you’ve got a Keogh, so there may not be a ton of upside unless you’re doing a Backdoor Roth.
And you probably don’t want to bother with the Backdoor Roth IRA unless you’ve completely exhausted other places to take advantage of tax efficiency.
The Bottom Line
Keogh’s are a great tool for wealthy individuals who happen to also be self-employed.
They are more challenging to set up and administer than a Solo-401(k), but the contribution limits can make them a powerful tax-saving tool if you have a high income.
Personally, I would only use a Keogh if I wanted to establish my own defined benefit plan and I’d have a long talk with a financial planner and/or tax expert before jumping into it.
