The Keogh Retirement Plan For The Self Employed
The Keogh retirement plan is a tax deferred retirement savings program that is designed for those who earn a self-employed income. Partnerships and sole owners of a business are eligible as they are not considered to be employees. The plan can cover a self-employed person plus a spouse. The two types of Keogh retirement plan are the money purchase and profit sharing plans. The money purchase contributions are compulsory and the same percentage contribution must be made each year regardless of profits. The profit sharing contributions can change each year and participants in the Keogh plan can make contributions to both versions of the plan in the same year.
Money purchase plans limit the contributions to the smaller amount between either 25% of the self employment income and $40,000. Profit sharing Keogh contributions vary from 0 to 20% of new business income up to a maximum of $40,000. The amounts are deducted from the participant's annual taxable income. The earned income that pertains to the limits basically means the net income from the business after all of the applied deductions including the contributions for the Keogh retirement plan.
Keogh retirement plans allow high maximum contributions that grow tax free until withdrawal when they are taxed as ordinary income. Due to the fact that contributions are taken pre-tax, the taxable salary is then reduced which is a big plus. The contribution limits are not as stringent as IRA schemes and certain lump sum benefits can be eligible for 10 year averaging to balance out the income. As well as participating in a Keogh retirement plan, the participant is permitted to invest in regular IRA plans.
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Restrictions apply in regards to withdrawals; penalties are accrued if the withdrawals begin before the participant is 59 ½ while withdrawals must begin before the participant is aged 70 ½. If the participant owns more than 5% of the company the withdrawals begin by the 1st of April when they reach the age of 70 ½ regardless of whether they have retired or not. The Keogh retirement plan does take some work to establish but participants can be helped to execute it by a brokerage house and the contribution limits make it worth the effort. If you are self-employed and eligible for a Keogh, then start saving in a Keogh retirement plan as soon as possible. The sooner you start, the more opportunity your money has to grow. |
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