Tuesday, July 15, 2014
At one time the Keogh plan was the hottest retirement planning commodity around. Today however, Keoghs are regarded by many as relics. Nonetheless, this type of plan may still hold value for some practitioners.
As a review, the Keogh plan was intended to provide a feasible option for unincorporated small business owners who were otherwise restricted or closed out of qualified retirement plans. There are two main types of Keogh plans: the defined contribution Keogh and the defined benefit Keogh. For the defined contribution Keogh, the maximum deductible contribution in 2014 is equal to the lesser of $52,000 or 15% of earned income. With the defined benefit Keogh, the limit is based on actuarial computations. The plan may provide an annual retirement benefit equal to the lesser of 100% of earned income for the three highest-paid years or a specific dollar amount adjusted for inflation.
Be aware that in computing “earned income” for a plan, your earnings from self-employment are reduced by your contributions and one-half of the self-employment tax you pay. Also not the maximum amount of compensation allowed for this calculation is limited in 2014 to $260,000.
Due to subsequent tax law modifications and the emergence of solo 401(k) plans the Keogh plan is not as prevalent as it was in past years. Yet the plans are not extinct, and have the ability to provide a fast way for unincorporated business owners to build up a nest egg.
See Ken Berry, Retirement Plans for Small Businesses: The Keogh Plan Is Not Extinct, CPA Practice Advisor, July 11, 2014.