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Retirement Plans For The Self-Employed
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Article 4: Keogh Plans
Keogh plans for the self-employed have been around for decades. They’re complicated to administer and not easy to set up. A Keogh plan should be established in consultation with accountants or tax lawyers. The government also requires annual reports filed, which can be costly to produce each year.
For such reasons, and because of newer, more flexible, easier options like the solo 401(k), few new Keoghs are being created. However, the Keogh still provides a high ceiling for sheltering retirement money, up to $42,000 per year.
Keoghs allow you to put money in the plan annually, deduct your contributions and postpone taxes on your investment earnings until they are withdrawn. Except in the case of disability or other major events, you can’t withdraw funds from the plan before retirement age.
If you’re a high-income self-employed person, you might consult with your tax attorney and accountant to see if a Keogh plan may be the best option for your circumstances. Their complexity and administrative challenges also make Keoghs more appropriate for well-established, profitable businesses. As a self-employed person, you are obliged to make contributions every year to defined-benefit Keogh plans.
Keoghs are flexible in that they permit both defined benefit and defined contribution options. A self-employed person may make a tax-deductible contribution of up to 20 percent of annual income, up to $42,000. Those 50 years of age or older also can make additional catch-up contributions of up to $3,000 a year.
Defined benefits can generate as much as $130,000 a year in retirement benefits. But annual contributions need to be calculated by an actuary based on your income, the target benefit desired, years until retirement and what you expect to earn in investments. The fees alone for actuaries, lawyers, accountants and annual reports might make Keoghs an unattractive option for many of the self-employed. Profit-sharing Keoghs mitigate some of those costs, although a SEP-IRA is probably a better option.
The defined benefit Keogh plans are better for people who are relatively young, with perhaps 20 years or more before retirement. These plans can be set up as 401(k), profit-sharing or money purchase plans.
If you have employees, in most cases you will be required to include them in your Keogh. In trying to minimize the costs associated with including employees, you may find yourself choosing something less than what is optimum for yourself. A 401(k) sometimes is an option to minimize such costs.
Keogh plans permit you make additional nondeductible investment contributions. The money you earn on those contributions accumulates tax free, but is taxed when withdrawn presumably at a lower rate when you are retired, earning less and in a lower tax bracket. The non-deductible contributions, however, can be withdrawn tax free.
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Retirement Plans For The Self-Employed
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