TYPES OF KEOGH PLANS
A Keogh plan is a retirement plan for the self-employed or for
employees of unincorporated, mostly small, businesses. Money you place into
a Keogh grows tax-free until it is withdrawn. Full-time employees must be included
in a Keogh plan if they have worked for the company more than three years. You
cannot take money out of your Keogh without a potential tax penalty before you
turn 59½ and separate from service.
A defined benefit Keogh lets you choose the specific amount
you will receive from the fund at retirement.
To reach this amount in time, a percentage of your yearly earnings
based on an actuarial formula goes into the account each year. The formula uses
your age (life expectancy), estimated retirement benefit amount and years to
retirement, to come up with the amount that goes into the fund each year. A
defined benefit plan allows a greater current income tax break for older employees
(and employers) because larger contributions are required to fund a specified
future benefit with fewer years to retirement.
In a defined contribution Keogh plan, the amount of your
retirement benefit depends on the amount of your annual contributions and the
The most you can place into your account each year is $42,000 or
100 percent of your annual net income, whichever
is smaller. Employees receive the same percentage in their individual accounts
as you put in yours.
There are two types of defined contribution plans.
If contributions to the plan are based on profits, the plan is
called a profit sharing plan.
If the plan puts money away based on a percentage of pay, it is
known as a money purchase plan.
The money purchase Keogh may be better for those who begin saving
for retirement early in life. With a money purchase plan, the employer must
contribute the same percentage of wages to the plan each year, whether or not
the company makes a profit. The percentage employers contribute under a profit
sharing plan can change each year, and there is no mandatory contribution amount.
Now that you understand the basics of the Keogh plan, let's
look at why you might want to place your money in a Keogh instead of an IRA