What is a Keogh plan?

Being self-employed is a dream for millions of Americans, but it’s important to save for retirement along the way as you’re building up your business. As a self-employed worker, you may find yourself unable to participate in many traditional employer-sponsored retirement plans. That’s where a Keogh plan comes in.

A Keogh plan, pronounced KEY-oh, is a tax-deferred retirement plan available to income earning self-employed individuals and unincorporated businesses, such as sole proprietorships and LLCs.

Although the IRS changed the name to “H.R. 10 plan” or “Qualified Plans for Self-Employed Individuals,” many in the industry still refer to them as Keogh plans, which were originally named after the representative who introduced the legislation to create them.

Keogh plans can operate similarly to a pension plan, profit-sharing plan or a 401(k), and are more complicated than a SEP IRA or solo 401(k). They typically require help from financial professionals, which could include actuaries, tax advisors and financial advisors. However, in certain cases, a Keogh plan could make sense for highly paid self-employed individuals.

Let’s take a closer look at how they work and what else you need to know if you’re considering a Keogh plan.

How Keogh plans work

There are two major types of qualified plans: defined benefit plans and defined contribution plans. Both plans allow retirement funds to grow tax-free, but each type has its own IRS rules, structure and ideal use cases. Here’s an overview of how they work.

Defined benefit plans

This type of plan operates like a traditional pension, meaning you’ll receive an annual retirement benefit based on your previous salary (typically the average compensation of your three highest-paid consecutive calendar years). The annual benefit — your pension — does have a cap, which usually increases each year. For 2024, it’s $275,000 or 100% of your compensation, whichever is lower.

Contributions to the plan generally must be paid in quarterly installments and there is typically a minimum funding standard. The maximum deduction and maximum contribution will need to be calculated by a financial professional.

Defined benefit plans are complicated to administer even when the plan participant is solely yourself. The IRS states that you’ll generally need continuing professional support for tasks such as actuarial calculations, which are required to determine your plan contribution requirements.

Defined contribution plans

Qualified defined contribution plans come in two types: profit-sharing plans and money purchase pension plans. Both provide benefits to the participant based on the amount contributed to the account. Defined contribution plans have a maximum deduction of 25 percent of participant compensation plus the amount of elective deferrals made. The maximum employer contribution in 2024 is $69,000 or 25 percent of the participant’s salary, whichever is lower.

Profit-sharing plans are more flexible than money purchase pension plans and can have varied employer contributions, or even no contributions for the year.

Money purchase pension plans, on the other hand, require fixed contributions, even if there are no profits or earned income. For example, if you set up a money purchase pension plan that requires contributions of 15 percent of the employee’s compensation (regardless of whether you’re self-employed or a small business owner), you’ll have to contribute that amount even if your company doesn’t make money that year.

Who is eligible for a Keogh plan?

For the most part, Keogh plans only make sense if you’re a sole proprietor and high-earning, but you may be better served by other, more popular retirement plans such as SEP IRAs and solo 401(k)s.

If you’re self-employed, you can set up a Keogh plan and designate yourself as the only participant. Small business owners will have to meet IRS minimum requirements for the number of plan participants, which is generally based on a percentage of the number of employees.

What is the maximum contribution to a Keogh plan?

According to the IRS, for Keogh defined benefit plans, there are no annual contribution limits. Your contributions should be calculated by an actuary and will be based on the benefit you set and factors including your age, expected returns and more. Defined benefit plans are pension plans, and while contributions don’t have a set limit (again, your contribution amount should be determined by an actuary), the IRS caps your annual benefit amount each year. For example, the maximum annual pension in 2024 can be up to $275,000.

For defined contribution Keogh plans (profit-sharing plans and money purchase plans), the employer contribution limit is $69,000 but will depend on employee compensation. Employee contributions, made as salary elective deferrals, will depend on if the plan allows it and could be up to $23,000 (or more if you’re over 50).

What is the difference between a Keogh plan and a 401(k)?

While Keogh plans and 401(k)s are both types of tax-advantaged retirement accounts, the plans differ in a few significant ways, namely:

• Contribution limits. Defined benefit Keogh plans do not have contribution limits. 401(k)s limit you to $23,000 in contributions in 2024 if you’re under 50 years old. For those age 50 and older, your 401(k) limit is $30,500. The total contribution limit, including employer contributions, is $69,000, or $76,500 for age 50 or older.
• Employer contributions. Keogh plans are generally funded solely by employer contributions. In some cases, employees may be able to contribute, but the contributions will not be deductible for participants, only employers (that means for self-employed, you’ll have to consult the IRS deduction worksheet and likely work with a tax professional to figure out how much you’re allowed to deduct). 401(k)s, on the other hand, are more flexible and allow contributions from both the employee and the employer. Contributions from both employee and employer are deducted from your taxable income, unlike Keogh plans, which only deduct employer contributions. Some companies that offer 401(k)s use employer contribution matching as a benefit, while others don’t contribute anything and simply offer 401(k)s for employees to enroll and contribute to on their own.
• Complexity. Keogh plans can be much more complex to set up and maintain than 401(k)s, which are more common and easily serviced by a large number of financial institutions.
• IRS rules. Keogh plans are subject to more complex rules due to the complicated nature of defined contribution plans and defined benefit plans, which are the two types of Keogh plans. 401(k)s are more standard and typically easier to administer.

Bottom line

For the majority of solopreneurs, SEP IRAs, solo 401(k)s and other retirement options are the best bet for saving and growing retirement funds. However, if you’re a high-income small business owner or high-earning self-employed individual and want to establish a pension for yourself, a qualified defined benefit plan might make sense. Just keep in mind you’ll have a higher administrative load for setting up and maintaining the plan and more complicated IRS requirements to meet. For anyone considering retirement options, consulting a financial advisor is a good first step.