Keogh Plans, commonly known as HR-10 Plans, are qualified retirement savings plans for self-employed individuals and their employees, including sole proprietors and partners. Compared to other plans such as SEP Plans and SIMPLE IRAs, Keogh Plans allow an employer to establish more stringent eligibility for plan participation. Keogh plans also allow an employer to establish a vesting schedule for all contributions.
Keogh Plans require more administrative responsibilities for the employer, such as filing IRS Form 5500 or 5500-EZ. Due to the added complexity and required administration of a Keogh Plan, options like SEP Plans and SIMPLE IRAs will usually be more suitable for self-employed individuals and small business owners.
Advantages
Tax-deductible contributions For 2008, the maximum deductible contribution allowed is the lesser of (1) $46,000 or (2) 25 percent of annual compensation. The maximum amount of annual compensation that may be considered for the 25 percent limit is $230,000.
For 2007, the maximum deductible contribution allowed is the lesser of (1) $45,000 or (2) 25 percent of annual compensation. The maximum amount of annual compensation that may be considered for the 25 percent limit is $225,000.
Tax-deferred earnings Your contributions and earnings grow tax-deferred until you take a withdrawal. Compounded tax-deferred growth allows your retirement savings to accumulate more rapidly than they would in a fully taxable account.
Additional information
Participation Within limits, self-employed individuals can specify the number of years an employee must work and the age they must attain before they are eligible to participate in the plan. These specified eligibility requirements also apply to the self-employed individual who sets up the plan.
Withdrawals Withdrawals are taxed as ordinary income, but there may be a 10 percent penalty imposed by the IRS if you receive withdrawals before you reach the age of 59½. You are eligible for withdrawals when you reach normal retirement age or separate from service.