Keogh: Retirement Plan for the Self- Employed
Keogh plans are the self-employed equivalent of corporate retirement programs. They come in two basic flavors: profit-sharing plans and defined benefit pension plans. To get a deduction for the current tax year, the plan must be established before year's end. Once that's done, actual contributions can be deferred until the extended due date for that year's return.
Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income (up to 20% versus 13% for SEPs) subject to a $30,000 ceiling. A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).
Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $130,000. Each year's contribution must be calculated by an actuary -- the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns. Annual actuarial fees and the required IRS report can run up to a couple grand. Another negative: You're locked into making the actuarially determined contribution each year. However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble -- because it permits much bigger contributions than any other type of program. If you're younger, go with a SEP or profit-sharing Keogh.
Keogh Retirement Accounts
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