Retirement Plans – Keogh Plans
As long as your business isn’t incorporated, you can establish a Keogh plan for retirement savings. These plans let you put away more money than either SEPs or SIMPLEs, and they’re also much more ﬂexible; for example, these give the option of either deﬁned beneﬁt or deﬁned contribution, while the others offer only deﬁned contributions. On the downside, they’re more complicated to set up and to manage, and that usually makes them more costly. If you’re considering a Keogh, head straight to a pension professional for help with the details.
In addition to a lot of administrative burdens, Keogh plans also come with prohibited transactions rules and some ﬁduciary requirements—more reasons why you should have a professional set up and manage the plan. These rules, especially the prohibited transactions, are stricter for Keoghs than for any other small-business retirement plan. The one that’s often a major sticking point has to do with the money itself: you (and any of your co-owners) can’t borrow any money from the plan for any reason. As for ﬁduciary responsibilities, whoever manages the plan is held to the highest possible standards of conduct and must always act in the best interests of the plan. If the plan suffers losses, that manager (no matter who it is, even if it’s you) could be held liable by the participants; that means he (or you) could have to pay them back.
Keogh plans mirror the style of corporate retirement plans but aren’t available for corporations. If you have a corporation, you can use the corporate version of the Keogh through a standard profit-sharing or defined benefit plan. You’ll have virtually the same pension plan; it just has a different name.
It seems like a lot of trouble, but the amount you’re allowed to contribute could make up for all of that, especially if you have a lot of proﬁts to put away. The maximums depend on whether your Keogh is set up as a deﬁned contribution or deﬁned beneﬁt plan. For deﬁned beneﬁt, your contribution is limited to the lesser of 100 percent of your average compensation for the three highest years or $175,000. For deﬁned contribution, it’s the lesser of 100 percent of your share of the company’s proﬁt or $44,000. Both of those maximums follow the 2006 law and may increase in the future.