Keogh Plan: Definition, Types, Advantages & Disadvantages

By
Julia Kagan
Julia Kagan
Full Bio

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Learn about our editorial policies
Updated May 07, 2023
Reviewed by
David Kindness
David Kindness
Reviewed by David Kindness
Full Bio
David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.
Learn about our Financial Review Board

What Is a Keogh Plan?

"Keogh plan" is a term used to describe qualified plans that cover the self-employed. This includes defined-benefit plans and defined-contribution plans, though most plans are set as the latter. Contributions are generally tax-deductible up to a certain percentage of annual income, with applicable absolute limits in U.S. dollar terms, which the Internal Revenue Service (IRS) can change from year to year.

Key Takeaways

  • "Keogh plan" is a term used to describe tax-deferred pension plans—either defined-benefit or defined-contribution—used by self-employed individuals.
  • Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners.
  • Because current tax retirement laws do not set apart incorporated and self-employed plan sponsors, the term "Keogh plan" is rarely ever used.

Understanding the Keogh Plan

Keogh plans are the same qualified plans other small businesses can use: the defined-contribution plan, which include profit-sharing plans and money purchase plans, and the defined-benefit plan. However, the IRS calls them Keogh plans if they cover a self-employed individual.

Keogh plans can invest in the same set of securities as 401(k)s and IRAs, including stocks, bonds, certificates of deposit (CDs), and annuities.

The term comes from U.S. Representative Eugene Keogh, who was instrumental in passing the Self-Employed Individuals Tax Retirement Act of 1962. Because the act was passed to ensure the self-employed had access to retirement plans, any plans designed for them became known as Keogh plans. However, the distinction between corporate and other retirement plan sponsors was removed when the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed.

As with other qualified retirement accounts, funds in a Keogh plan can be accessed as early as age 59½, and withdrawals must begin by age 73.

Types of Keogh Plans

Qualified Defined-Contribution Plans

Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made on a regular basis up to a limit. Profit-sharing plans are one of the two types of Keogh plans that allow a business to contribute up to $66,000 as of 2023. A business does not have to generate profits to set aside money for this type of plan.

Money purchase plans are less flexible compared to profit-sharing plans and require a business to contribute a fixed percentage of its income every year that is specified in plan documents. If a company alters its fixed percentage, it may face penalties. The contribution limit for 2023 for money purchase plans is set at 25% of annual compensation or $66,000, whichever is lower.

Qualified Defined-Benefit Plans

Qualified defined-benefit plans state the annual benefits to be received at retirement, and these benefits are typically based on salary and years of employment. Contributions towards defined-benefit Keogh plans are based on stated benefits and other factors, such as age and expected returns on plan assets. For 2023, the maximum annual benefit is $265,000 or 100% of the employee's compensation, whichever is lower.

Advantages and Disadvantages of Keogh Plans

Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans.

The key advantage to Keogh plans is that they have higher contribution limits, making them a popular option for many high-income business owners.

What Is the Difference Between a Keogh and IRA?

Keogh plans are designed for the self-employed. While the self-employed can contribute to an IRA, Keogh plans have much higher contribution limits.

Who Is Eligible for a Keogh Plan?

Keogh plans are for the self-employed, so you can enroll in one if you're a sole proprietor or work for yourself.

Is a Keogh the Same as a solo 401(k)?

A solo 401(k)—also called a one-participant 401(k)—is a regular 401(k) with a special calculation for a sole proprietor or small business with no employees. A Keogh plan has much higher contribution limits than a solo 401(k).

The Bottom Line

A Keogh plan is a retirement plan for the self-employed or unincorporated small businesses. They are generally defined contribution plans or defined benefit plans.

Keogh plans can invest in the same instruments as other types of retirement plans, such as stocks, bonds, certificates of deposit (CDs), and annuities.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Internal Revenue Service. "2023 Limitations Adjusted as Provided in Section 415(d), etc.," Page 1.

  2. Internal Revenue Service. "Publication 560 | Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 3.

  3. Congress.gov. "H.R.1836 - Economic Growth and Tax Relief Reconciliation Act of 2001."

  4. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.