What is a Keogh Act Plan?
Definition & Meaning
A Keogh Act Plan, often referred to as an HR-10 Plan, is a tax-deferred pension plan for individuals who are self-employed and unincorporated businesses. This retirement savings plan permits self-employed professionals to set up personal pension plans with comparable tax advantages to corporate pensions.
Etymology & Background
The Keogh Act Plan derives its name from New York Congressman Eugene Keogh, who pushed for the legislative measure. Formally named the Self-Employed Individuals Tax Retirement Act, it was established in 1962 as a route for self-employed persons to secure their retirement futures with favorable tax treatment.
Key Takeaways
- Eligibility: Sole proprietors, partnerships, and self-employed individuals qualify.
- Contribution Limits: Allows higher contribution limits compared to traditional IRAs.
- Types: Split into two categories: Defined Contribution (Profit-Sharing and Money Purchase) and Defined Benefit Plans.
- Tax Advantages: Contributions are tax-deductible, providing immediate tax relief.
- Flexibility: Offers options in terms of contribution amounts and investment choices.
Differences and Similarities
Differences Between Keogh Plans and Traditional IRAs:
- Contribution Limits: Keogh plans generally have higher contribution limits.
- Eligibility: Keogh plans are designed primarily for self-employed individuals, unlike IRAs.
- Complexity: Keogh plans tend to be more complex to set up and manage compared to IRAs.
Similarities:
- Both offer tax-deferred growth.
- Penalties for early withdrawals before age 59½.
- Required minimum distributions start at age 70½.
Synonyms
- HR-10 Plan
- Self-Employed Retirement Plan
- Keogh Plan
Related Terms
- IRA (Individual Retirement Account): A retirement account allowing individual tax-deferred savings.
- 401(k) Plan: An employer-sponsored retirement savings plan with tax advantages.
- SEP IRA (Simplified Employee Pension): Another retirement plan for self-employed individuals with less administrative complexity.
- Profit-Sharing Plan: A type of plan under the Keogh Act allowing flexible annual contributions based on business profit.
Frequently Asked Questions
What are the investment options within a Keogh Plan?
Keogh plans offer various investment choices, including stocks, bonds, mutual funds, and other securities, similar to other retirement plans.
Can employees of a sole proprietor participate in Keogh Plans?
Yes, employees can participate, and the proprietor must follow specific contributions rules and nondiscrimination requirements.
How does the contribution limit of a Keogh Plan compare to other retirement accounts?
Keogh Plans typically allow higher contributions, potentially reaching up to $58,000 (2021 limit), depending on the plan type and income.
Exciting Facts
- High Contribution Limits: The IRS allows generous contribution limits on Keogh plans, encouraging maximum retirement savings.
- Historical Relevance: Initiated during the Kennedy administration, it noticeably expanded retirement security for self-employed individuals.
Quotes & Proverbs
“It is not our job to predict the future, but to create a future where possible.” - Eugene Keogh
Humorous Sayings
- “Why did the self-employed individual cross the road? To contribute to his Keogh Plan before the year’s end!”
Government Regulations
The Keogh Plan is governed by the Earnings Limitation Test and must comply with ERISA (Employee Retirement Income Security Act) rules, ensuring fiduciary responsibility and fair play in the management of retirement funds.
Further Reading
- “Retirement Planning for the Self-employed” by Jane Parker
- “Advanced Pension Schemes” by Brian Marsh
- IRS Publication 560: Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Quizzes
Inspirational Thought
“Choosing the right path today brings liberty and financial tranquility tomorrow. Ancient wisdom meets modern prudence in the realm of retirement planning.” - Alexandra Smith
Farewell and remember to invest in your future wisely!
