Keogh vs. IRA: An Overview
A Keogh plan (pronounced KEE-oh), or HR10, is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed individuals. Contribution to this should come from net earnings from self-employment. This word itself is old. The Internal Revenue Service (IRS) now calls them “qualified plans.”
An Individual Retirement Account (IRA), in general terms, is a tax-advantaged account that individuals use to save and invest for retirement.
- Keogh plans are designed for use by unincorporated businesses and the self-employed.
- Contributions to Keogh plans are made with pretax dollars, and their earnings grow tax-deferred.
- Keogh plans can invest in the securities used by IRAs and 401(k)s.
- Keogh contribution plans are popular among sole proprietors and small businesses and offer relatively high contribution limits.
There are two types of Keogh: defined-contribution plans, also called HR (10) plans, and defined-benefit plans. The latter include money-purchase schemes and profit-sharing plans. Both types of Keogh plans allow investments in securities, such as bonds, stocks, or annuities, similar to an IRA or 401(k) plan.
Keogh contribution plans are popular among sole proprietors and small businesses and have relatively high contribution limits that are as low as 25% of salary, or $58,000 in 2021 and $61,000 in 2022. A defined-benefit plan is set up similar to a pension. The IRS allows you to contribute up to $230,000 for 2021 and up to $245,000 for 2022.
Keoghs contributions are made pretax, reducing the contributor’s taxable income. Self-employed individuals can generally deduct the entire annual Keogh contribution amount, including contributions made on behalf of employees. Interest, dividends and capital gains earned in Keoghs are tax-deferred until the start of the withdrawal.
History of Keghu
The Keogh Plan, named after Eugene James Keogh, the U.S. Representative from New York, was established by Congress in 1962, Expanded in the Economic Reforms Tax Act of 1981, and reworked in the Economic Development and Tax Relief Reconciliation Act of 2001. Contribution maximums vary between Keogh plans.
Prior to 2001, Keoghs were the go-to retirement plans for the self-employed, but since the law changed and “no longer distinguishes between corporate and other plan sponsors, the term is rarely used,” according to the IRS.
Thanks to legislation enacted by Congress in 2001, Keogh plans are now called “qualified plans” by the IRS.
An Individual Retirement Account (IRA) can be set up by any individual saving for retirement, as long as they have earned qualified income under IRS rules.
For both 2021 and 2022, the maximum contribution is $6,000 per year. For those age 50 or older, an additional $1,000 per year catch-up contribution can be made until the end of the tax year. Employers are not allowed to make contributions on behalf of employees.
similarities and differences
Keoghs and IRAs both require distributions at age 72, and you can access the funds as early as age 59. You can also convert a Keogh to an IRA (Traditional or Roth), but you must roll over the funds withdrawn from Keogh within a 60-day window to avoid being hit by taxes and potential penalties for early withdrawals. Can go It is best to do this with a direct transfer, trustee-to-trustee. If you’re transferring Keogh money to a Roth, taxes may also be due – check with a tax advisor before making any changes, and to make sure all relevant tax forms for Keogh are properly filed. went.
The primary differences between the two plans are the contribution limits and individual versus employer contributions. After-tax contributions can be made to IRA accounts, but Keogh contributions offer a higher tax deduction. In addition, Keoghs offer plan options for self-employed individuals or small business owners, while IRAs are restricted to individuals.
There is another option as well. When trying to decide between a simplified employee pension (SEP) plan and a Keogh, keep in mind that Keogh costs more to maintain and comes with more paperwork. However, Keogh’s contribution limits are much higher, providing the ability to supply more cushion in retirement based on annual contributions.
Retirement plans are an essential part of any portfolio, and the same is true for the self-employed. After all, securing your future financial independence is one way to relieve stress in your later years. To see some of the best places to start with one of these accounts, you can check out Investopedia’s list of the best brokers for IRAs and the best brokers for Roth IRAs.