HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
What is it?
• a qualified retirement plan that covers a sole
proprietor or partner who works in his or her own
business
• in general, works like any qualified plan
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
When is it indicated?
• self-employed business owner needs long-term
capital accumulation for retirement
• owner of unincorporated business wants a plan that
provides retirement benefits for regular employees as
well as for business owner
• need to shelter self-employment income from income
tax
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Advantages
1.
Keogh contributions are deducted from gross
income and tax deferred until funds withdrawn at
later date
2.
investment income in Keogh plan tax deferred
3.
plan loans to owner-employees subject to same
rules as are applied to regular employees
4.
some lump-sum benefits eligible for special 10 year
averaging
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Advantages
5. limits on Keogh plan contributions are more liberal
than IRA contributions
6. business employees must participate in the plan
7. certain employers may be eligible for $500 business
tax credit of up to $500 for ‘qualified startup costs’
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Disadvantages
1. Keoghs involve cost and complexity of qualified plans;
can minimize these factors if use prototype plans
2. large number of employees may increase costs
required to meet nondiscrimination rules
3. 10% penalty plus tax on amounts withdrawn before
age 59½
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Disadvantages
4. Keogh plans follow qualified plan distribution rules; for
more than 5% owner, distributions must begin by April
1 of year after attain age 70½, regardless of
retirement status
5. life insurance for self-employed person is treated less
6. favorably than for regular employees
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Types of Keogh Plans
typical plan is designed as profit share without a fixed
contribution formula, but other forms may be used
defined contribution plan
–
–
–
tax deductible contributions to limit of 25% of total payroll of
plan participants
flexible contributions
compensation base limited to $245,000 (2009)
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Types of Keogh Plans
401(k) plan
– can establish a solo 401(k) plan
– matching contributions to 401(k) plan for self-employed
person are not treated as elective employer contributions;
thus not subject to $16,500 (2009) annual limits
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Types of Keogh Plans
money purchase plan
– fixed annual contribution formula of up to 25% of earned
income
– mandatory contributions
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Types of Keogh Plans
defined benefit plan
– advantageous for older employee
– allows higher contribution level than defined contribution
plans
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
How are Keoghs Different from Other Qualified
Plans?
since self-employed individuals are technically not
“employees,” some special rules exist regarding
treatment of
– earned income
– life insurance
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
How are Keoghs Different from Other Qualified
Plans?
earned income
–
for self-employed, ‘earned income’ takes the place of
‘compensation’ in applying qualified plan rules
–
earned income is net income from business after all
deductions; deduction for 1/2 of self-employment tax
must be taken before taking deduction for Keogh plan
contributions
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
How are Keoghs Different from Other Qualified
Plans?
life insurance
–
can be used as an incidental benefit in a plan covering selfemployed
–
the pure life insurance element of an insurance premium is
NOT tax deductible
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
How are Keoghs Different from Other Qualified
Plans?
life insurance (cont’d)
–
only the portion of the premium that exceeds the pure
protection value of the insurance is deductible
–
Table 2001 costs, although included in income because they
were nondeductible, are NOT includible in cost basis
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Tax and ERISA Implications
• Keogh plans generally have same tax and ERISA
implications as regular qualified plans
• annual reporting requirement for qualified plans
simplified for many Keogh and other small plans
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Alternatives
incorporate the business and adopt a corporate plan
– owner then becomes shareholder and employee of
corporation
– may result in higher taxes
– advantage of corporate plans over Keogh plans is minimal
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Alternatives
Simplified employee pension (SEP) or SIMPLE IRA
– may be simpler to adopt than Keogh plan
– SEP can be adopted as late as the individual’s tax return
filing date, past the deadline to adopt a new Keogh plan
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Alternatives
tax deductible IRA contributions
–
may be adopted as late as the individual’s tax return filing
date, past the deadline to adopt a new Keogh plan
–
IRA contribution limits are much lower than Keogh plan limits
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
How to Install a Plan
Keogh plans follow installation procedure for qualified
plans
‘prototype plans’ designed by bank, insurance company,
mutual fund, or other financial institution are common
– institution does most of the paperwork to install plan at low or
no cost
– self-employed must keep most or all funds invested with that
institution
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
True or False?
1. An owner of an unincorporated business can utilize a
Keogh plan.
2. A person who has self-employment income as well as
income from employment can use a Keogh plan to
defer taxes on the self-employment income.
3. Keogh plan limits are more generous than the limits
on an IRA.
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
True or False?
4. A Keogh plan becomes more costly to administer the
more employees that are covered.
5. A defined benefit plan cannot be used as a Keogh.
6. “Earned income” for the self-employed does not
include a deduction for Keogh plan contributions.
7. Life insurance in a Keogh plan is treated the same
way as it is in any other qualified plan.
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HR 10 (Keogh) Plan
Chapter 22
Employee Benefit & Retirement Planning
Discussion Question
Suppose a self-employed person has a Keogh plan.
Discuss what would happen in each of the following
situations:
a) plan participant becomes disabled
b) plan participant dies
c) plan participant wants to initiate and fund a traditional IRA or
Roth IRA
d) plan participant is also covered under a corporate plan as an
employee
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