Your Guide to Keogh Plans and How They Work

By Ashley Kilroy · February 17, 2022 · 7 minute read

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Your Guide to Keogh Plans and How They Work

Keogh retirement plans are one type of tax-deferred retirement plan that self-employed individuals and their employees use to invest and grow their savings. Although they’re relatively uncommon today,

Keogh plans are still an option that some high-income savers may use to save for their golden years, however a tax law change in 2001 that made other options more appealing has resulted in declined use of such plans.

The IRS now refers to Keogh accounts as HR-10s or qualified retirement plans. For most self-employed individuals, however, there are other savings options that offer similar benefits with a lower administrative burden for the account holder.

Keogh Plan Definition

A Keogh plan is a type of retirement plan available to self-employed individuals and their employees. Those eligible to establish a Keogh plan include partnerships, small businesses, sole proprietorships, and limited liability companies (LLCs). Once set up, employers fund Keogh plans are employer-funded and with tax-deferred contributions.

Keogh plan rules require that if you set up a Keogh and you have employees, you must set up Keogh plans for any workers who have logged at least 1,000 hours for you over the past three years.

Referred to as qualified plans or HR-10s by the IRS, Keogh plans have some similarities to 401(k)s. However, Keogh plans differ from 401(k)s because of their high annual contribution limits, particularly for small businesses.They work best for specific categories of self-employed individuals, such as financial professionals, dentists, and lawyers.

In recent years, Keogh plans have fallen out of favor, with most self-employed workers opting for Solo 401(k)s or SEP IRAs instead.

What Is a Keogh Plan?

Like other types of retirement plans, you contribute money to a Keogh plan to grow for retirement under a tax shelter. The Keogh plan then uses those funds to invest in various assets, like exchange-traded funds (ETFs), bonds, or stocks.

You can make these contributions to a Keogh to lower your taxable income because you make these contributions before taxes. You deduct the amount contributed from your taxes each year you do so. As a result, taxes on the plan’s total value only come due once you start making withdrawals in retirement.

Keogh Withdrawals

Once you hit age 59 ½, you become eligible to withdraw from your Keogh plan. You can determine how you want to receive your money when you retire, either in one lump sum or installments. It is also up to you how much you receive in each installment and their payment frequency.

There are consequences if you withdraw early or delay, though. Taking money out of your plan before age 59 ½ typically results in a 10% penalty along with income tax. Once you hit 70 ½, you must take distributions from the account. If not, you incur a 50% penalty tax on the withdrawal you should have taken.

These are the same early withdrawal penalties you see in more popular tax-deferred retirement accounts, including traditional IRAs and 401(k)s.

Types of Keogh Plans

When starting a retirement fund, you will encounter multiple options. Keogh plans also come in different forms, and one may suit you more than the other. These are the two variations you should know:

Defined-Contribution Plans

A defined-contribution plan requires you to decide how much money you put into the fund each year. You can do this either through profit-sharing or money purchasing. Your business pays into the account along with the former, whereas the latter means you contribute a fixed amount of income annually.

In 2022, profit-sharing allows you to contribute up to 100% of your compensation or $61,000, whichever is less. However, you can decide your contribution amount each year with a profit-sharing plan.

Alternatively, a money-purchase plan lets you choose your Keogh plan contribution limit from the outset. Limits cannot be changed. It also abides by the same IRS limits as a profit-sharing plan.

Defined-Benefit Plans

Defined-benefit plans are pension plans based on your years of employment and your salary. They prioritize guaranteed, set benefits, so you choose a pension goal and then put money in the account to fund it. For 2022, your annual benefit cannot exceed $245,000 or 100% of your mean compensation over your three highest consecutive calendar years, whichever is less.

These plans typically involve complex calculations to find the right balance of contribution and investment. They use personal factors like age and return goals to inform these calculations.

Pros of Keogh Plan

There are certain advantages to Keogh plans which may make them a retirement option for self-employed individuals to consider. For example, Keogh plans are a versatile savings vehicle. Depending on your retirement goals, you can open one as a defined-benefit or defined-contribution plan.

In addition, Keogh plans come with high contribution limits. So, they appeal to people who want to pursue more aggressive saving strategies.

Cons of Keogh Plan

Keogh plans do face their share of limitations. For example, they are restricted to self-employed workers and specific types of self-employed persons. Common-law employees, partners, and independent contractors cannot open a Keogh plan. Only those who work for or own an unincorporated business can qualify.

Keogh plans also require substantial administrative paperwork compared to other retirement accounts like traditional IRAs or a SEP IRA. Many times, someone opening a retirement plan can do so on their own. But a Keogh plan requires complex calculations that may require professional help.

Keogh Plan vs 401(k)

Keogh plans are less popular these days than alternatives like a 401(k) plan. Although the two share some traits, certain factors give 401(k) an advantage.

A 401(k) is a commonly offered employer-sponsored retirement plan based on the defined-contribution format. In 2022, most participants can contribute up to $20,500 in 2022. Participants 50 and older can contribute an additional $6,500.

That means 401(k) participants have lower contribution limits than those in a defined-benefit Keogh plan, who can contribute up to $245,000 for 2022.

But Keogh plans have a limited reach. They are only available to self-employed individuals and their employees. On the other hand, 401(k) plans are widely accessible to workers. So whether you work in a traditional office setting or freelancing, you may have the opportunity to open a 401(k).

Self-employed workers can open an individual 401(k), also called a solo 401(k) or a one-participant 401(k). This qualified retirement plan functions almost identically to traditional 401(k)s. So, self-employed individuals can contribute the standard contribution limit ($20,500 for 2022) and an additional 25% of net earnings.

Also, Keogh plans tend to come with administrative burdens that 401(k)s do not. So, the latter is generally easier to set up and consistently manage.

Keogh Plan


Choice between defined-contribution plan or defined-benefit plan Defined-contribution plan only
Pre-tax contribution and taxed withdrawals Pre-tax contributions and taxed withdrawals
No loans Can take a loan out on the balance
Withdrawal age starts at age 59 ½ Withdrawal age starts at age 59 ½
Withdrawals required by age 72 Withdrawals required by age 72 unless working
Higher contribution limits (with defined-benefit plan) Accessible to wider range of companies, including owners or self-employed workers

The Takeaway

Regardless of which type of retirement account you use, it’s important to start saving for retirement as soon as possible. The earlier you start, the more time you’ll have to benefit from compound returns as your savings grow through the decades.

While SoFi does not offer Keogh plans, it does allow users to start saving for retirement. Once you open an account on the SoFi Invest® online brokerage, you can start saving for retirement via a traditional individual retirement account, a Roth IRA, or a SEP.


Who qualifies for a Keogh plan?

Keogh plans are for self-employed workers and their employees. You are eligible to open a Keoph as long as you operate as a small business owner, partner, sole proprietorship, or limited liability company (LLC). However, independent contractors, common-law employees, and single members of a partnership cannot open a Keogh plan.

What is the difference between a Keogh plan and a 401(k)?

Both Keogh plans and 401(k)s are retirement savings vehicles, but they have different eligibility rules, contribution limits, and administrative requirements. Keogh plans are solely for self-employed workers, have higher contribution limits (with defined-benefit plans), and come with more administrative paperwork.

In comparison, 401(k)s are available to a broader range of workers, including company-salaried employees and self-employed individuals. They have lower contribution limits, but they are simple to set up.

Are Keogh plans still available?

Keogh plans are still available, although you may hear them called qualified plans or HR-10s. They are only available to self-employed workers and their employees, though.

Photo credit: iStock/Weekend Images Inc.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


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