Keogh Plan

What is a Keogh Plan?

A Keogh Plan is categorized as a “qualified plan” by the Internal Revenue Service (IRS), and designed for a self-employed individual who runs a small business and their employees. Unincorporated businesses that are classified as sole proprietors or partnerships are eligible to set-up this type of retirement plan. However, as per IRS rules, “a common-law employee or a partner can’t set up one of these plans”.

This type of tax-advantaged retirement vehicle was first introduced in 1962 by Congressman Eugene Keogh, through the Self-Employed Individuals Tax Retirement Act. However, the structure of the plan was altered in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The IRS explains that “retirement plans for self-employed people were formerly referred to as ‘Keogh plans’ after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.”

Keogh Plans are now commonly referred to as “H.R. 10 plans” and are categorized as qualified plans. There are two types of qualified plans: defined contribution and defined benefit. A defined contribution Keogh is established in the same manner as either a money purchase pension plan, or a profit-sharing plan. Conversely, a qualified plan categorized as a defined benefit Keogh, is structured like a regular pension plan. The IRS rules stipulate that “ contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants.”

It is important to note that a Keogh Plan necessitates a considerable amount of paperwork each year, as stipulated by the IRS. Specifically, Form 5500 must be filed on an annual basis.

 

Keogh Plan Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a qualified plan like a defined benefit Keogh plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds. 

 

Keogh Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

Keogh Plan Contribution Limits

The Internal Revenue Agency (IRS) has specific contribution limits for a defined contribution Keogh and a defined benefit Keogh. For 2020, as per IRS regulations, total contributions to a defined contribution Keogh plan cannot exceed the lesser of “100% of the participant’s compensation, or $57,000”.

Regarding a defined benefit Keogh, the IRS regulations stipulate that the annual benefit cannot exceed the lesser of “100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or $230,000 for 2020”.

It is important to note, that catch-up contributions for qualified plans are not subject to the limitations imposed by the IRS.

 

Keogh Plan Calculator

A Keogh Plan can prove to be an excellent retirement investment choice because it is a tax-advantaged investment vehicle.  There are numerous components that contribute to the amount of savings you set aside for retirement. Use this Keogh Plan calculator to determine how much you could potentially save.

 

Major Keogh Plan Providers

Prudential 

Prudential is one of the largest financial services companies in the world. This company offers both defined contribution and defined benefit plans. Prudential offers plan sponsors, one of the highest-rated full-service retirement plans available on the market.

Principal 

Established in 1879, Principal Financial Group is another world-renowned financial services company. Principal offers qualified plans and is another popular retirement plan provider for employers around the United States.

 

Keogh Plan FAQs

A Keogh Plan is a tax-advantaged retirement vehicle that was first introduced in 1962 by Congressman Eugene Keogh, through the Self-Employed Individuals Tax Retirement Act. However, the structure of the plan was altered in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. The IRS explains that “retirement plans for self-employed people were formerly referred to as ‘Keogh plans’ after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.”

It is now categorized as a qualified plan by the IRS. There are two types of qualified plans: defined contribution and defined benefit. The IRS regulations indicate that “contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants.”

A Keogh Plan is a “qualified plan” designed for a self-employed individual who runs a small business and their employees. Unincorporated businesses that are classified as sole proprietors or partnerships are eligible to set-up this type of retirement vehicle.

Conversely, a 401(k) is categorized as a “defined contribution plan”, where the employee funds the account with paycheck deductions prior to taxation. Additionally, with some 401(k) plans, the employer will make proportionally matched contributions to the account based on elective deferrals of the employees.

The Keogh Plan was first introduced in 1962 by Congressman Eugene Keogh, through the Self-Employed Individuals Tax Retirement Act. The IRS explains that “retirement plans for self-employed people were formerly referred to as ‘Keogh plans’ after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.”

Keogh Plans are now deemed “qualified plans” and are commonly called “H.R. 10 plans”.

The Internal Revenue Agency (IRS) has specific contribution limits for a defined contribution Keogh and a defined benefit Keogh. For 2020, as per IRS regulations, total contributions to a defined contribution Keogh plan cannot exceed the lesser of “100% of the participant’s compensation, or $57,000”.

Regarding a defined benefit Keogh, the IRS regulations stipulate that the annual benefit cannot exceed the lesser of “100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or $230,000 for 2020”.

It is important to note, that catch-up contributions for qualified plans are not subject to the limitations imposed by the IRS.

If you are 59 ½ or over, you can withdraw funds from a Keogh Plan without penalties. However, if you are not yet 59 ½ years old, the IRS will also impose a 10% penalty tax on the withdrawal on top of the normal income taxation.

The IRS has stringent rollover rules that must be followed if you don’t want to incur hefty tax penalties. Funds from a qualified plan like a defined benefit Keogh plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

The primary benefit of rolling your Keogh Plan into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

The investment options offered through a Keogh Plan are the same as a 401(k), and dependent upon the plan provider. Below are the types of investments available to you with a Keogh Plan:

• Mutual funds
• Exchange-Traded Funds (ETFs)
• stocks
• bonds
• Certificates of Deposit (CDs)

It is crucial to note that as per IRS rules, a Keogh Plan cannot be used to invest in physical precious metals bullion. The easiest method to invest in gold, or another precious metal with a Keogh Plan is to buy mutual funds that include mining company stocks, or invest outright in the stocks of gold mining companies. This investment strategy is known as purchasing “paper gold.” Mining ETFs and gold ETFs are also available, which provide indirect exposure to the precious metal.

The main difference is that a traditional IRA is an individual retirement vehicle that you can set up on your own.

Conversely, a Keogh Plan is a qualified plan designed for a self-employed individual who runs a small business and their employees. Unincorporated businesses that are classified as sole proprietors or partnerships are eligible to set-up this type of retirement plan. However, as per IRS rules, “a common-law employee or a partner can't set up one of these plans”.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.