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Keogh Plan: Do I Need it for Self-Employed Retirement?
Keogh Plan Definition – What is it?
If you are self-employed on your own or employed by a small business without a retirement plan, it is in your best interests to consider a Keogh Plan. This is a tax-deferred pension plan for your retirement. Contributions to this plan are also tax deductible.
If you own and run your own business, and making a significant amount of money and want to contribute more to your retirement, this is a plan for you to consider.
Keogh Plan Contribution Limits
Just like there are limits to how much you can contribute to a 401K or a Roth IRA, there are limits to how much you can contribute to a Keogh.
This plan has an annual contribution limit of 25 percent of your earnings, and the amount changes each year.
In 2008, the most you could contribute was $46,000 and in 2009, the limit was $49,000. In 2012, the amount was $50,000.
*This is much, much more than the contribution limits of a 401K or an IRA, for example. According to the IRS, the maximum contribution limit for IRA's was $5,500 and $6,500 for ages 50 and older in 2012.
*For a 401K plan, the maximum contribution allowed in 2012 was $17,000, and $22,500 for ages 50 and older.
What is the Better Retirement Plan Option?
What is the Better Retirement Plan Option for Self-Employed?
What Can You Invest In With a Keogh?
You can set up the plan as either a defined contribution plan (think 401K), or as a defined benefit plan (like a pension plan). There are benefits to both.
With a defined benefit plan, you are guaranteed a set annual payment. You set up your contributions now to make sure that you will get the exact amount in annual payments when you retire.
Or you may choose to opt for the defined contribution plan (contributions max of 25 percent of your income, as I mentioned above). You set the fixed amount you want to invest. However, you must make sure you make the exact amount of contribution or you could get a penalty, and to change the amount is a complicated process.
You can invest in stocks, bonds, or mutual funds, just like you can do in a 401K.
Keogh vs. IRA?
What is Better - Keogh or IRA's?
- With a Keogh, you can also contribute to a tradition IRA or a Roth IRA.
- People like the Keogh because of the higher contribution limits.
There are some drawbacks. Keogh plans require a lot of paperwork to set up. You need professional help to establish the plan.
- Unlike a Roth IRA, which is tax free when you withdraw, you must pay tax on your withdrawal in a Keogh when you retire.
- Penalties could apply for an early withdrawal.
The Keogh plan really makes the most sense for self-employed people who earn a lot of money and want to contribute more to their retirement.
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