Self-employed people or small businesses that fit certain criteria can save for retirement through a qualified plan known as HR 10, a plan that used to be known as a Keogh plan. I still use the term Keogh because qualified plan seems to general, and even the IRS still mentions the name so people will make the connection. Keogh was the name of the guy that first designed these plans in 1962. He created the Keogh Act for LLCs, sole proprietorships or partnerships. If your business is structured like one of those above, find out more about qualified plans and their maximum contribution limits in 2014.
Qualified Plan (Keogh) Limits 2014
A Keogh is similar to a 401(k) retirement plan, but it comes in two varieties. A defined benefit plan is like a traditional pension, which you can fund with as much as $205,000 in 2013 and $210,000 in 2014, up to 100% of compensation. This makes it an interesting choice for highly compensated self-employed individuals who want to contribute some extra dollars before retirement.The defined contribution plan lets you define the amount you will put in each year. You may get a Keogh You define the contribution that will be made each year. You can do this in two ways: profit-sharing or money purchase. With profit-sharing you can contribute up to up to a $50,000 limit in 2012, and can deduct up to 25% of income. What you choose to contribute to a profit-sharing plan can change each year. With a money purchase plan, you determine at the outset the percentage of profits that will be placed in the Keogh. But that contribution is required if there are profits, and can't be changed. If the contribution isn't made, you will face a penalty.
Contributions made to each type of plan are made on a pre-tax basis, meaning they are taken out of your taxable salary or you can take an upfront deduction on your annual income tax return.Investing in a Keogh
As with a traditional 401(k), the money contributed to a Keogh can be invested tax-deferred until retirement beginning at age 59 1/2 and no later than age 70. Withdrawals made before that time will be taxed on a federal and possibly state and local income level, plus, with some exceptions, you will likely be hit with a 10% penalty fee.
You invest your qualified plan money in a typical range of investments. You can choose from stocks, bonds, mutual funds, and any other types of investments.
Unlike other types of small business retirement plans, Keoghs must be established before the end of the year to get a deduction on that year's income taxes. But if you have one established, you can make contributions for the prior year up until the time you file your taxes.
Are HR 10s or Keogh Plans Right for Your Business?
If you are considering an HR 10, you should know that they require a good deal of annual paperwork. An IRS Form 5500 must be filed each year, and for most of us that will require the help of a tax accountant or financial professional. In fact, if you are considering a Keogh you should probably discuss your options with a financial planner or tax advisor. I can't even begin to cover the possible complexities of these plans for you and your business. (Even the IRS site seems lacking in information.) If you are a one-person operation, a SEP IRA has similar limits and is much simpler to establish and maintain.
The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.