Keogh Plan Definition
The Keogh plan was developed by a United States Representative from New York named Eugene Keogh. A Keogh plan is a tax deferred retirement plan which has some advantages to the self-employed companies that have less than 10 employees working for them.
Keogh Plan Meaning
There are two types of Keoghs. The first is a defined contribution plan in which a fixed sum or percentage of a paycheck each period is contributed to the keogh account. In total a person can generally contribute 25% of their annual earnings at a max of $49,000. The employer is also able to contribute a total of $16,500 to each employee’s account making the total contribution $65,500. This is higher than other contribution plans making it a huge benefit.
The second, which is known as a defined benefit plan works off of a complicated pension formula which requires the work of an actuary. Although both of these plans receive more in benefits and contributions than most other retirement funds, there are several disadvantages as well. There is a penalty if a person pulls money out of their account before they’re 59 1/2. Withdrawals are also taxable as they are taken out of the account. However, because you are able to contribute cash without it being taxable the account is able to grow more quickly.
Keogh Plan Example
Dexter owns a Law firm in which he has 9 employees, Dexter wants to contribute the maximum amount of 25% of his salary to his Keogh Plan. Dexter makes a salary of $300,000 at this rate Dexter would contribute $75,000 into his Keogh account. However, she is only allowed to contribute a total of $65,500 ($49,000 + $16,500) as are the limits to a Keogh retirement plan.