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Keogh Plan

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Guide to Setting up a Keogh Plan

Self-employed? Consider a Keogh plan for retirement savings.


Back in 1962, when there were limited alternatives for self-employed individuals interested in starting their own pension funds, Congress created the Keogh plan as a new type of self-directed retirement program. A lot has changed in the world of retirement plans since then, but the Keogh is still around.

The Keogh provided greater flexibility for small businesses than other types of plans and was later expanded to include employees as well as owners. While recent expansion of 401(k) programs for small business have in some ways made the old Keogh plans less attractive, they still carry a great retirement saving kick.

A Keogh plan for your business can:

  1. Give you and your employees a way to set aside pre-tax dollars for retirement
  2. Shelter retirement plan income from taxes
  3. Give you tax deductions for making contributions
  4. Help you attract and keep employees by providing a retirement benefit.


Action Steps

The best contacts and resources to help you get it done

Determine your retirement needs Before setting up any retirement plan, take a look at your financial situation. Key information includes the number of years until you expect to retire, your income and other retirement plans and investments you might have.

I recommend:  Get help figuring out your retirement needs with retirement and savings planning calculators at FinancialPlanningToolkit.com.

Get to know the Keogh If your business is a sole proprietorship or a partnership, you can participate in a Keogh plan. In most cases, you'll want to set up a qualified plan, which means your plan must comply with IRS rules for pension plans.

I recommend:  Discover who can have a Keogh plan and find a comparison of small business retirement plan options, including Keogh plans, at InvestSafe.com.

Choose a defined contribution or defined benefit plan Your Keogh plan needs to use one of two methods: defined contributions or defined benefits. A defined benefit plan, which is generally more complex to set up, provides for a predetermined retirement benefit amount. The retirement benefit in a defined contribution plan depends on how much is contributed and how well the investment performs.

I recommend:  Review a list of benefits and drawbacks for each type of plan and find your contribution limits using a Keogh contribution calculator at TIAA-CREF.org.

Choose a money purchase or profit-sharing plan If you choose a defined contribution plan, your Keogh can be either a money purchase plan or a profit-sharing plan, or a combination of both. With a money purchase plan, you must make the same contribution each year regardless of your profits or losses. The contribution to a profit-sharing plan can change each year.

I recommend:  Discover the differences in money purchase and profit-sharing plans at the IRS Web site.

Create the Keogh plan document Once you're ready to establish your Keogh plan, you'll need to draft a document that meets the IRS requirements. Be forewarned: the paperwork requirements are extensive, but you can adopt a master or prototype plan that's been pre-approved by the IRS. Financial institutions that manage Keogh plans can provide you with an IRS-approved plan. If you have employees, you must share the plan with them and give them the opportunity to participate.

I recommend:  View a prototype Keogh plan and adoption agreement that can be used to open a Keogh plan at TIAA-CREF.org or download a Keogh plan prototype from Bear, Stearns.

File with the IRS Once you've created your Keogh plan, you'll have to file statements about it with the IRS. The filing requirements vary depending on how you set up your Keogh and whether or not you have employees. Check with your accountant to make sure you file correctly.

I recommend:  See the reporting requirements section of the IRS publication, Retirement Plans for Small Business for more information on forms you may have to file. Download IRS Form 5500 Annual Return/Report and other forms for your Keogh from Financial Planning Toolkit.

Tips & Tactics

Helpful advice for making the most of this Guide
  • Get good financial advice: There may be plan options that are less hassle and offer greater flexibility, like a 401(k). Make sure you have a financial adviser and/or accountant who has dealt with retirement plans and pension plans.
  • Be prepared for a long commitment: Closing a pension plan is not an easy task. Once you've decided on your plan, you should expect to keep it for an extended period of time.
  • Keep good records: You should make arrangements to keep good financial records of your plan so you can answer questions that may come up years after contributions are made.
  • Use tax benefits: Contributions to your plan can give you some nice tax breaks. Make sure you claim all that you are entitled to.

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How-To Guide from WORK.COM

Guide author
By Irwin Speizer
Self-employed? Consider a Keogh plan for retirement savings.
Back in 1962, when there were limited alternatives for self-employed individuals interested in starting their own pension funds, Congress created the Keogh plan as a new type of self-directed retirement program. A lot has changed in the world of ... Read more



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