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How Can I Establish a Keogh Plan?

As self-employment continues to rise, the need for self-employed individuals to secure their financial future has never been more critical. This is where a Keogh Plan, also known as an HR-10 plan, comes into play. Keogh Plans are tax-deferred retirement plans designed for self-employed individuals or unincorporated businesses. This includes sole proprietorships, partnerships, and Limited Liability Companies (LLCs). In this article, we'll provide a step-by-step guide on how you can establish a Keogh Plan.

Getting Started: Drafting the Plan Document

Setting up a Keogh Plan primarily requires two main components: a plan document and a means for investment. The first step in establishing a Keogh plan is preparing the plan document. The plan document outlines the specifics of your retirement plan - what type of Keogh plan you're establishing (defined benefit or defined contribution), who the eligible employees are, and how much can be contributed.

The plan document can either be put together by the sponsor (you, as the self-employed individual), or you can choose to use the standard plan document from a prototype plan provided by a broker-dealer or trustee institution. Although you are not obliged to submit this document to the Internal Revenue Service (IRS), it is a vital tool to fully explain and disclose your employees' rights regarding the plan, should you have any.

Obtaining IRS Determination

If you desire added peace of mind, the IRS offers a service where they evaluate the plan document. In return, they provide a letter of determination, indicating whether the plan correctly implements the relevant statutes. This service comes with a fee for larger employers, but employers with fewer than 100 employees can receive the letter at no cost.

Taking Advantage of Safe Harbor Provisions

Certain Keogh plans fall into a "safe harbor" category. A safe harbor plan is one that automatically meets certain IRS requirements, thereby reducing administrative burdens. A notable example is the Individual 401(k), a type of profit-sharing Keogh for sole proprietors. If the plan's assets do not exceed $250,000, you are not required to file a Form 5500-EZ, thereby making the paperwork minimal or even nonexistent. When the assets do exceed this amount, filing the form is a straightforward process that takes only a few minutes.

Enlisting Professional Help for Complex Plans

Not all Keogh plans are created equal. More complicated plans, especially those involving a significant number of employees or those that include defined benefit components, may require more effort. These cases often necessitate professional help. Working with a financial planner or tax professional can help ensure that your Keogh plan remains compliant with IRS regulations, while also meeting your specific retirement planning needs.

Establishing a Keogh Plan is a prudent step for self-employed individuals and unincorporated businesses to secure their financial future. The process, though it may appear daunting initially, can be simplified by understanding the necessary steps, utilizing available resources, and seeking professional guidance when needed.

A Keogh plan will primarily need a plan document and a way to invest. A Keogh plan can be established by any self-employed individual of a sole proprietorship, partnership, and Limited Liability Company (LLC).

A plan document must be put together by the sponsor, or the standard plan document from a prototype plan at a broker-dealer or trustee institution can be used. It is not necessary to submit the document to the IRS, but if you have any employees, it is required that you use this document and any other printed information necessary to fully explain and disclose their rights in regards to the plan.

If requested in writing, the IRS will evaluate a plan document and give them a letter of determination, which will explain if the plan has correctly implemented the relevant statues or not. For larger employers they will charge a fee for this service, but employers with fewer than 100 employees can receive a letter of determination at no cost.

Some plans will fall into a safe harbor category which will make their paperwork minimal or nonexistent. Individual 401(k)s, which are a type of profit-sharing Keogh for sole proprietors, must only file a 5500-EZ if their assets accumulate to over $250,000, and the form takes but a few minutes to fill out.

More complicated plans, that involve more employees or perhaps defined benefit components, will require more effort and professional help.

If I Want to Establish a Keogh Plan, Do I Have to Establish One for All Employees of My Business?
What are Articles of Incorporation?
What are Articles of Partnership?
How Does a 401(k) Compare With Other Retirement Plans?

 Disclaimers and Limitations

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