KEOGH Plans

Keogh plans are the self-employed equivalent of corporateretirement programs. To get a deduction for the current tax year,the plan must be established before year’s end. Once that’s done,actual contributions can be deferred until the extended due datefor that year’s return.

The Keogh plan is generally attractive to businesses withseveral highly paid owners and executives. Law firms and medicalpractices, for example, tend to gravitate toward it. Althoughanyone can establish a Keogh plan, it is best for companies with 10employees or fewer because the funding burden is entirely on theemployer.

Keoghs can be administered as either a profit-sharing plan or adefined benefit plan. Annual contributions to Keogh profit-sharingplans are based on a percentage of self-employment income orcompensation and are subject to a $42,000 ceiling. A plan documentmust be drafted in Year One (this may cost several hundreddollars), and the IRS demands an annual report (which you canprobably do yourself).

A Keogh defined benefit plan is designed to deliver a targetedannual retirement benefit, which can be as high as $170,000. Eachyear’s contribution must be calculated by an actuary–the exactamount depends on your income, the target benefit, years untilretirement and anticipated investment returns. Annual actuarialfees and the required IRS report can cost as much as severalthousand dollars. Another negative: You’re locked into making theactuarially determined contribution each year. However, if you makegood money and are over 50, a defined benefit plan may be worth allthe trouble–because it permits much bigger contributions than anyother type of program. If you’re younger, go with a profit-sharingKeogh.