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Comparing Keogh and IRA: Is There a Difference?

Comparing Keogh and IRA: Is There a Difference?

The Keogh plan (HR 10 plan) is a tax-deferred retirement plan funded by the employer targeted at self-employed people and businesses that are not incorporated. Distributions to such plans are usually from the self-employment net earnings. The Keogh plan is an outdated term as Uncle Sam now refers to it as distributed plans.

On the other hand, an IRA (individual Retirement Account) is a tax-advantaged account an employee can use to  save for retirement.


Keogh Plans

This exists in two forms: 

  • Defined-contribution plans also called HR (10) plans. 

  • Defined benefit plans. Examples are profit-sharing plans, money purchase plans, etc.

With both types of Keogh plans, one can invest in securities like stocks, bonds, annuities like a 401(k) plan or IRA. This plan is popular with small businesses and sole proprietors with a pretty high contribution limit: the lesser of 25% of wages or $58000 for 2021. The Keogh plan setting is similar to a pension plan, and as of 2019, Uncle Sam allowed a contribution of $230,000 for 2021 and 2020.

All funds contributed to such an account are made before taxes, which bring down the taxpayer's taxable income. Generally, the IRS allows self-employed folks to deduct the contribution amount for Keogh for a whole year.  There will not be tax on the capital gains, dividends, and interest in a Keogh account till the owner starts withdrawal. 


Keogh: A Brief History

The Keogh plan was named after Eugene Keogh James; a US representative is one of the plans of the Congress in 1962. It was later broadened to the Economic Recovery Tax Act of 1981, which was suspended again in 2001. There are various Keogh plans with varying maximum contribution limits. 

Prior to 2021, Keoghs served as the effective retirement plans for many self–employed folks. After the law changed, which removed the distinction between the various plan sponsors and corporate plans, they hardly used the term again. 

Due to Congress's legislation in 2001, the IRS coined the name "qualified plans" for Keogh plans. 


IRA plans 

Anyone who wants to save for retirement can establish an individual retirement account (IRA), provided they earn income that is eligible based on Uncle Sam’s rule. The maximum distribution rule is set at $6,000 for 2020 and 2021. For people at 50 years and above, there is the allowance for an extra $1,000 for each year till they get to 70½ at the tax year-end. Employers cannot make contributions for their employees. 


Similarities and Differences 

The distribution age for both Ira and Keogh plans 70½, and users have access to the funds as early as age 59½. There is also the opportunity to convert a Keogh plan to an IRA (Roth or Traditional) even though one needs to roll over the funds taken from a Keogh plan in 60 days to bypass taxes and other penalties that come with early withdrawal. This is best done with the direct transfer from a trustee to another. 

Also, note that there might be taxes involved in moving funds from Keogh to a Roth account, making it essential to contact a tax advisor before making any move. In addition, one needs to ensure that all-important tax forms are completed for the Keogh. 

The contribution limit, alongside the individual and employer's contribution, is the main difference between these two plans. With Keogh's contribution, one can get a higher tax deduction, and the plan choices are directed at small business owners and the self-employed. At the same time, IRA is restricted to individuals only. 

Also, in deciding between Keogh and SEP (Simplified employee pension plan), one needs to be aware that Keogh costs a lot to maintain with a series of paperwork. However, the contribution limit for Keogh is pretty higher, giving you the ability to have more in savings for retirement.  This, however, depends on the annual contribution amount. 


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