The Keogh plan is mostly a pension plan and mostly covers self employed people as well as other sectors such as family businesses, law partnerships, and medical practices and so on. The Keogh plan is named after Eugene James Keogh, the U.S. Representative in New York. The plan is also sometimes referred to as the HR10 plans.
The Keogh retirement plan was established through the legislation that was made by the Congress in the year 1962. The main goal of the plan was to add financial stability to the older adults and the retirees by providing them with additional funds.
Features and advantages
The Keogh plan is applicable for organizations which consist of 10 or less employees which are highly paid. The plan is mostly an employer sponsored plan and is also based on employee contributions.
One of the main advantages of the plan is that it allows you to contribute up to 100% of your income. The annual upper limit for the defined contributions is $49,000 in the year 2009 while it was $46,000 in the year 2008. The defined benefit amount can go up to$175,000.
Like other retirement plans, the money that you contribute into the this plan is also tax deferred until you withdraw the money. After you withdraw the money, you are liable to various taxes. One needs to pay penalties if he or she withdraws the money before the stipulated time period. This type of plans is applicable for different kinds of investment instruments. However, collectibles or metals are excluded from the investment list.
In case of the defined contributions under the Keogh retirement plan, the employees receive the amount after they retire. There are some factors which determine the defined contributions like the number of years one has worked, the earnings one has made and also the expenses, the incomes and the losses. In case of the defined benefits, the employees receive fixed amount of money on a monthly basis after they retire. The defined benefits allow the employees to make their own decisions regarding investments.
The calculation of the limit of deduction is the factor that makes the Keogh plan different from the employer-sponsored plans and the self employed workers plan. This is because the employer is required to pay his or her share to the FICA or for Social Security tax. In case of the people who are self employed, they should pay both to the employer and employee part of the FICA. It is due to this reason that the new income that one enjoys under the Keogh or HR10 plans are adjusted so as to remove the double potion of FICA.
In case of the Keogh plans, the maximum deductible amount in a year is same as the lesser part of the money that amounts to around 20% of the gross self employed income. Anyone who has attained 59.5 years of age can contribute to the account. You should start the withdrawals once you reach 70.5 years of age.