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Keogh Plan

A Keogh Plan is a retirement plan that may be set up if you are self employed with net earnings after gross income is deducted from business or professional income. The net income must come from your proprietorship or partnership for which the Keogh plan is established.

If you are not an active owner of the partnership, you cannot establish a Keogh Plan unless you receive guaranteed payments for services that are treated as earnings from self employment.

To set up a Keogh plan, it must be submitted in writing to the Internal Revenue Service (IRS) before the last day (December 31) of the year in which you want the plan to take effect.

You may set up a Keogh Plan if you are employed and are a member of a company sponsored retirement plan if you operate a self employed profession or enterprise on the side based on your business earnings. In this case, the company sponsored retirement plan and the Keogh Plan are independent of each other.

An individual partner may not set up a Keogh Plan. It must be established by the partnership and must include all employees who are at least 21 and have been with the partnership for at least one year.

Part time or seasonal employees who work less than 1,000 hours during the year are generally not required to be included in the plan.

There are 2 types of Keogh Plans. The Defined Benefit Plan and the Defined Contribution Plan with each having it's own rules and benefits. Deductible limits for a Keogh plan depends on whether you have either one of the two plans.

  • The Defined Benefit Plan is based on an IRS formula and actuarial assumptions. The Defined Benefit Plan provides for a specific retirement benefit funded by quarterly contributions. It does not fix a specific retirement benefit. What it does though, is set the amount of annual contributions so that the amount of retirement benefits depends on contributions and income earned on those contributions. The Defined Benefit Plan is basically a profit sharing plan if contributions are geared to profits. If the plan requires fixed contributions regardless of profits, it is a money purchase plan.
  • The Defined Contribution Plan is based on limits on annual contributions and other additions, excluding earnings. The Defined Contribution Plan may be adjusted for inflation.

If you receive distributions from a Keogh Plan before age 59 1/2, unless you are disabled or meet other criteria, you may be penalized.

The Keogh plan requires complicated calculations that may make it necessary to seek expert services.

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