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What are the Contribution Limits for My Keogh Plan?

The contribution limit for a Keogh Plan depends on what type of Keogh Plan you set up. There are Defined Contribution and Defined Benefit Keoghs. Defined Contribution plans could be profit-sharing or money-purchase plans.

As of 2013, a Defined Contribution Keogh Plan allows the employer to contribute up to 25% of your income, or $53,000, whichever is less, and this will constitute the profit-sharing or money-purchase aspect of the plan.

In profit-sharing plans, they can function like a 401(k), and also include a window for the employee (or owner/employee) to defer up to $18,000 or 100% of compensation, whichever is less, and this also opens a window for the employer to include a matching contribution to the plan.

It is worth noting that for a owner/employee paying self-employment (FICA) taxes, the “employer” contributions will actually be limited to 20% of gross income/profit, but this works perfectly with the maximum considered income of $265,000, bringing possible contributions right up to the $53,000 limit.

As you can see from the profit-sharing example, multiple components can be included in a single Keogh. An experienced CPA and/or financial advisor should be consulted if you are attempting to construct your own Keogh instead of using an approved prototype Keogh from a financial institution.

In the early 2000’s, a sweeping audit of existing Keogh plans reportedly found that 1/3rd of them were not compliant with regulations. The IRS will actually give you a free opinion of whether your proposed plan document is allowable, if you have fewer than 100 employees.

Keoghs are one of the least understood types of plans, so we suggest you play it safe consult experts, and the IRS, before you contribute anything. Contribution limits of a Defined Benefit Keogh Plan are even more complicated. The amount you contribute depends on the annual pension you select.

The calculations involved in Keogh Plans are intricate and may require you to hire an actuary. The contribution limits for Defined Benefit Keogh plans were decreased in 2001 with the Economic Growth and Tax Relief Reconciliation Act, making them only as appealing as their defined-contribution counterparts, but still requiring much more administration. They subsequently have largely fallen out of favor.

Where do I find a Financial Advisor?
What are the Contribution Deadlines for My Keogh Plan?

Keywords: taxation, retirement accounts, saving for retirement, pension, defined contribution, defined benefit, individual 401(k), EGTRRA, IRS Publication 560,