Keoghs plans are tax-deferred retirement plans intended for self-employed individuals and their employees. There are two types of KEOGH plans, Defined Contribution Plans and Defined Benefit Plans . Defined Contribution Plans can be further separated into Profit Sharing and Money Purchase plans.
If the employer offers a Keogh Plan, employees working over 1,000 hours or more each year or employees that have worked for three years at the company must be covered. The employer can only take up to 25% of his or her income or $40,000.
For a Money Purchase plan, the contribution is mandatory; the employer has to contribute the same percentage every year, regardless of the company’s profits. Contributions have a limit of 25% of the participant’s income, not to exceed $40,000.
The Profit Sharing plan allows for changing contributions each year. Contributions are determined by a formula to allocate the overall contribution and distribution of accumulated funds after the retirement age. Employees can contribute to both plans in the same year and the amounts can vary each year. This plan has a limit of 25% of the participant’s income or $40,000, whichever is less.
Unless the plans are defined as an elective deferral plan, the contributions are not tax deductible. Contributions and earnings can grow tax-deferred until withdrawal.
There are two options, a single lump sum payout or monthly payouts. For lump sum distributions, 20% of the amount is reported each year for five years. Monthly distributions are taxed as ordinary income for each year received.