Saving for retirement comes with many choices, especially if you're self- employed. Finding the right plan for your situation is key to building long- term financial security. One option worth exploring is a Keogh plan. 

Designed for self-employed individuals and small business owners, a Keogh plan offers valuable tax advantages and higher contribution limits, making it a strong option for retirement savings.

What Is a Keogh Plan?

Keogh plans are tax-deferred retirement plans for self-employed people and unincorporated businesses. They allow for greater retirement savings than some other plans. People can choose from two types: defined benefit plans and defined contribution plans, including profit-sharing and money purchase plans.

The IRS says these are "qualified plans," which means they follow strict rules to get tax benefits.

With a Keogh plan, folks can put away larger amounts of their income each year compared to IRA or SEP options. For example, the maximum annual contribution can be much higher, allowing self-employed individuals to build up their retirement savings faster.

This makes it an attractive choice for those who earn a good amount from their businesses and want to invest a decent chunk into their future.

Types of Keogh Plans

There are two main flavors of Keogh plans for self-employed individuals: defined benefit and defined contribution. Each caters to different savings strategies and goals, offering flexibility for the self-employed crowd.

Defined Benefit Plans

These plans offer a set retirement benefit, functioning like traditional pensions. The employer promises to pay a specific amount each year during retirement. This promise is based on salary and years of service.

For self-employed individuals, these plans can be crucial. Contribution limits are higher compared to others, allowing for more savings. The Internal Revenue Service sets rules about how much you can put in each year.

Each participant gets an annual benefit, which they receive at retirement—providing financial security for the future.

A defined benefit plan ensures a steady income during your golden years.

Defined Contribution Plans

These Keogh options allow you to set aside money for retirement on a tax-deferred basis. You can contribute a fixed percentage of your income each year.

The limit for contributions is higher than many other retirement accounts, like traditional IRAs.

In these plans, both you and your business can make contributions. The amount invested grows over time based on the performance of the investments chosen. In retirement, you'll receive what you've saved and earned through investment returns. Contributions are flexible but must follow IRS rules to stay in good standing.

How Keogh Plans Work

Keogh plans let you save for retirement with tax benefits. You can put in a lot more money compared to other plans, which helps grow your savings faster. And yes, there are rules about how and when you can take out this money.

Contribution Rules

Contribution rules for Keogh plans vary based on the type of plan. For defined contribution plans, self-employed individuals can contribute up to 25% of their net earnings or a maximum of $70,000 in 2025.

The limit is whichever is lower. This helps maximize tax-advantaged retirement savings.

Defined benefit plans allow contributions based on expected returns and the benefits you set. These amounts depend on factors like your age and salary history. Contributions help build a solid financial future for retirement, ensuring you receive funds at retirement just like a traditional pension does.

Withdrawal Rules

Keogh plan withdrawal rules can be strict. You usually can't take money out until you're 59½ years old. If you withdraw early, you may face a penalty of 10% plus taxes on the amount taken out.

This rule helps keep your savings intact until retirement.

Once you reach age 73, you must start taking money out, known as required minimum distributions (RMDs). These withdrawals are taxed as regular income. Understanding how withdrawal rules work is key for self-employed individuals planning their retirement strategy.

Keogh Plans vs. Other Retirement Plans

Keogh plans stand out from other retirement options. They offer higher contribution limits, which can be a significant benefit for self-employed workers.

Comprehensive Comparison of Keogh Plans, 401(k) Plans, and SEP IRAs

Let’s explore how these three retirement plans differ across key features:

Eligibility

• Keogh Plans are designed for self-employed professionals and unincorporated businesses.
  
  
• SEP IRAs are available to self-employed individuals, freelancers, and small business owners.
  
  
• 401(k) Plans can be offered to any employee whose company provides one.
  
  

Contribution Limits (2025)

• Keogh Plans allow contributions up to 25% of income or $69,000, whichever is lower, for defined contribution plans. Defined benefit plans may allow much higher limits based on age and earnings.
  
  
• SEP IRAs also cap contributions at 25% of income or $69,000, whichever is less.
  
  
• 401(k) Plans permit employees to contribute up to $23,000, with an extra $7,500 in catch-up contributions for those aged 50 or older.
  
  

Loan Provisions

• Keogh Plans may allow loans, depending on the specific plan type.
  
  
• SEP IRAs do not allow loans.
  
  
• 401(k) Plans often allow loans, depending on the employer's plan rules.
  
  

Setup Deadlines

• Keogh Plans must be set up by the end of the fiscal year, usually December 31.
  
  
• SEP IRAs can be set up and funded by the tax filing deadline, including extensions.
  
  
• 401(k) Plans need to be established by the end of the calendar year.
  
  

Tax Filing Requirements

• Keogh Plans require filing Form 5500 if assets exceed $250,000.
  
  
• SEP IRAs have no annual filing requirements.
  
  
• 401(k) Plans require employer reporting, but employees don’t need to file anything separately.
  
  

Investment Options

• Keogh Plans offer a broad range of investments depending on the provider.
  
  
• SEP IRAs typically include stocks, bonds, and mutual funds.
  
  
• 401(k) Plans limit investment options to those selected by the employer or plan sponsor.
  
  

Tax Treatment

• Keogh and SEP IRA contributions are tax-deductible, with taxes deferred until withdrawal.
  
  
• 401(k) Plans may offer pre-tax or Roth options. Pre-tax contributions grow tax-deferred, while Roth contributions are made with after-tax dollars and withdrawn tax-free under certain conditions.
  
  

Withdrawal Rules

• All three plans impose a penalty for early withdrawals (before age 59½) and require minimum distributions starting at age 73.
  
  
• 401(k) Plans may include more flexible withdrawal rules, depending on the specific plan features.
  

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This comparison highlights how each plan serves a different purpose. Keogh Plans and SEP IRAs are designed for self-employed individuals and small business owners, offering higher contribution limits but with different flexibility levels—Keogh Plans allow loans, while SEP IRAs do not. Meanwhile, 401(k) Plans are best suited for employees, often featuring Roth options and employer matching. Each plan has its unique advantages, helping individuals maximize retirement savings based on their specific financial goals.

‍Pros and Cons of a Keogh Plan

A Keogh plan offers both benefits and drawbacks for self-employed individuals. It's important to weigh these carefully.

• High contribution limits exist. In 2025, you can contribute much more than with other retirement plans. This allows for significant savings each year.
• Tax advantages apply. Contributions to a Keogh plan are tax-deductible, reducing your taxable income in the year they are made. However, it's important to bear in mind that withdrawals during retirement are taxed as ordinary income.
• Investment options are flexible. Keogh plans can invest in a wide range of securities, including mutual funds, stocks, bonds, annuities, and even certificates of deposit, giving you diverse financial strategies to meet your goals.
• Retirement security is stronger. A Keogh plan acts as a safety net, ensuring you have funds when you retire years down the line.
• Heavy paperwork may be required. Aside from being more administratively intense—with the need to adopt a written plan document—maintaining a Keogh plan also requires annual filings of IRS Form 5500, which can be more complex compared to other retirement options like SEP IRAs.
• Withdrawal rules can be strict. If you take out money early, penalties may apply along with taxes on the amount withdrawn.
• Defined benefit plans may require funding commitments that some self-employed individuals find challenging to meet over time.
• Certain fees might arise from investment management or fund operations depending on how your assets are handled in the plan.

Consider these pros and cons carefully before deciding if a Keogh plan fits your needs as a self-employed individual or unincorporated business owner.

Work With a Financial Advisor to Optimize Your Retirement Savings

Keogh plans offer tax-advantaged retirement savings for self-employed individuals and small business owners, but they come with complex contribution rules and specific administrative requirements such as needing a written plan document and annual filings of IRS Form 5500.

If you're considering a Keogh plan, a Farther financial advisor can help you determine if it's the best fit for your financial goals, or if a different retirement plan—such as a Solo 401(k) or SEP IRA—might better suit your needs.

Contributions to Keogh plans are tax-deductible, reducing taxable income in the contribution year, but be aware that withdrawals during retirement are taxed as ordinary income.

Keogh plans can invest in a wide range of securities, including mutual funds, stocks, bonds, annuities, and certificates of deposit.

Make informed retirement decisions with expert guidance. Talk to an advisor today to explore your options.

Conclusion

Keogh plans provide excellent retirement savings options for self-employed individuals. Available in two types—defined benefit and defined contribution—they offer higher contribution limits than many other retirement plans.

Understanding how these plans function makes them even more valuable for your long-term financial goals.

Explore additional resources to deepen your knowledge of retirement savings options. Take control of your financial future today—it's never too early to start planning!

FAQs

1. What is a Keogh Plan?

A Keogh plan is a tax-deferred retirement plan designed for self-employed individuals or unincorporated businesses. Unlike an individual retirement account (IRA), Keogh plans offer much higher contribution limits compared to other qualified plans such as SEP IRAs.

2. How does a Keogh Plan work?

In the world of retirement planning, two types of Keogh plans exist - either a defined-contribution plan or defined-benefit plan. Defined-contribution plans include profit-sharing and money purchase pension plans, each having distinct contribution requirements — profit-sharing plans allow flexible contributions based on company profits, while money purchase plans require fixed annual contributions regardless of profitability.

3. What are the differences between a Keogh and an IRA?

The main difference between a Keogh and an IRA is their user base and contribution limits. Keogh plans, designed specifically for self-employed individuals and unincorporated businesses, offer higher contribution limits and more complex administrative requirements. IRAs are available to a broader range of individuals and feature lower contribution limits.

4. Who can benefit from using a Keogh Plan?

Keoghs are available to self-employed individuals or unincorporated businesses, including sole proprietors, partnerships, and limited liability companies (LLCs). They can be tailored as either profit-sharing plans, money purchase pension plans, or defined-benefit plans.

5. What factors determine my benefits received at retirement from my Keogh Plan?

For defined benefit Keoghs, your benefits are determined by a formula that takes into account factors such as age, years of service, and compensation history. The plan specifies a predetermined benefit amount, and contributions are actuarially calculated to fund this benefit.

6. What should I know about understanding Keoghs before setting one up?

Before setting up your own Keogh, consider factors like eligibility requirements, contribution limits, administrative responsibilities, and compliance with IRS regulations. Keogh plans offer higher contribution limits but also involve more complex administrative and reporting requirements compared to other retirement plans such as SEP IRAs or solo 401(k)s.

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