Self-employed and private sector employees can also benefit from specific retirement plans such as a Keogh plan. The Keogh plans can generate retirement funds on a tax free and tax-deductible basis. There are a number of factors that employees can calculate out pre-determined benefits by employing the use of specific formulas. Since the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which passed in 2001, there has been a movement from contributing to Keogh plans to contributing to Simplified Employee Pension (SEP) IRAs due to similar contribution limits and eligibility criteria.
Who is eligible for a Keogh plan? If one’s earnings are based on his/her own performance as well as being a part of a sole proprietorship, partnership, or limited liability corporation, and must have net-earnings then he/she becomes eligible for a Keogh plan. Here too, only the profit (gross income minus deductions) is considered. Some other criteria to meet- if an entrepreneur owns more than one business, it is mandatory that for all the businesses, Keogh plans should be availed without skipping a single business.
The plans under Keogh normally fall under two categories – ‘Defined-benefit plans’ and ‘Defined-contribution plans’. The ‘Defined-benefit plan’ is much like a traditional pension, except for the fact that it is completely self-funded.
The second type of Keogh is the ‘Defined-contribution plan’, based on the available funds in an employee’s account and the contributions made to it over the years. If one has employees, they must be allowed to participate in the Keogh Plan and are not allowed to contribute, 100% of the contribution comes from the owner.
If the contributions are positive and tend to bring profits, then the Keogh is a ‘profit-sharing plan’. If it is negative then the Keogh is a ‘money-purchase plan’. The ‘money-purchase plan’ is completely based on contributions made to an account from the percentage that the employees pay only.
The ‘profit sharing plan’ is based on 100% contribution from the employer or owner, with an upper limit of 25% of the compensation. The SEP IRA is most similar to the ‘profit sharing’ variation of the Keogh plan. Over the last few years, the SEP IRA has become more popular due to its similarity to the Keogh ‘profit sharing plan’ on eligibility criteria and contribution limit but with less paperwork
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to