The options for retirement are growing. It used to be that workers depended on their pension after working thirty years or more for a company. These days, employers offer retirement benefits to employees, and employees can also find other options on their own. For the self-employed person, a Keogh is an option for retirement saving.
What is a Keogh plan? A Keogh is a tax-deferred way of saving for retirement if you work for yourself. It operates in a way that is similar to an employer’s retirement plan. You put money in it and it is invested in a way that is determined by the account holder to grow their money. Keogh plans can be of two types: defined contribution and defined benefit.
A defined benefit plan is when the account holder contributes a certain percentage of money to the plan on a regular basis. For most, it is deducted on a monthly basis from their paycheck. If they get paid twice a month, the amount is split between two paychecks. The amount that you hope to receive from the plan when you retire is based on what you have put into it.
A defined contribution plan is one based on money put into an account for you. This can be based on the profits of the company. When the company makes a profit, money is distributed into the plan accounts. This plan can also be based on money contributed to employee accounts regardless of whether the company made a profit or not. This type of defined contribution is called a money-purchase pension.
For defined contribution plans, a limit of $30,000 exists. No more than that can be contributed to the plan. With a defined benefit plan, the maximum annual amount is around $100,000. This amount is based on a retirement at sixty-five years of age.
I know it sounds complicated. This is one of the disadvantages of a Keogh. Like other more conventional retirement plans, there are penalties assessed if the money is withdrawn before retirement age. The Keogh plan does not apply to retired business owners. If you are no longer active in the business even though you may get profits, you cannot set up a Keogh retirement plan.
Every disadvantage also has an advantage. Even a plan like this has a few. The funds that are put into a Keogh plan are tax deferred until they are withdrawn. The amount is deducted from gross income and not the net. If you contribute early during the year, the money has time to accumulate over the year. Some business owners can’t assess how much they make until near the end of the year, but contributions are still allowed at this time.
A person who owns more than one business is not limited to one Keogh plan. A Keogh plan can be started for each business a person owns. Self-employed people who also work a regular job can open a Keogh for their business.
Look at all of your options for retirement. Determine if they will help you to maximize your retirement funds.