Is a Keogh Plan a Defined Contribution Plan?

Keogh plans are retirement savings vehicles specifically designed for self-employed individuals and small business owners. These plans offer a structured way for independent professionals, sole proprietors, and partnerships to save for their retirement, often with significant tax advantages. Historically, the term “Keogh” emerged from the Keogh Act (H.R. 10), which first allowed unincorporated businesses to establish tax-deferred retirement plans. This article explores the nature of Keogh plans and clarifies their classification within the broader landscape of retirement savings options.

Understanding Defined Contribution Plans

A defined contribution (DC) plan is a type of retirement plan where contributions are made by the employer, employee, or both, into an individual account. The amount of contribution is typically defined, often as a percentage of salary or a fixed dollar amount, but the ultimate retirement benefit is not guaranteed. Instead, the final benefit depends on the investment performance of the assets held within the individual’s account. Investment risk is primarily borne by the plan participant, as the value of their account can fluctuate with market conditions.

Examples of common defined contribution plans include 401(k)s, 403(b)s, and Individual Retirement Accounts (IRAs). These plans allow participants to choose from a range of investment options, such as mutual funds, stocks, and bonds. Contributions and earnings within these accounts grow tax-deferred until retirement, at which point withdrawals are typically taxed as ordinary income.

Keogh Plans as Defined Contribution Plans

Keogh plans can be structured as defined contribution plans, aligning with the fundamental characteristics described previously. When a self-employed individual or small business establishes a defined contribution Keogh, they make contributions to individual accounts set up for themselves and any eligible employees. These contributions are specified, either as a fixed percentage of compensation or on a discretionary basis, reflecting the “defined contribution” aspect. The value of the retirement benefit ultimately received from a defined contribution Keogh plan depends entirely on the investment performance of the assets within each participant’s account. This structure allows for flexibility in contributions and provides a direct link between investment growth and the eventual retirement nest egg.

Types of Keogh Plans

The term “Keogh plan” serves as an umbrella for various qualified retirement plans available to self-employed individuals and unincorporated businesses. While often associated with defined contribution structures, Keogh plans can also take the form of defined benefit plans.

Within the defined contribution category, two primary types of Keogh plans exist: Money Purchase Plans and Profit-Sharing Plans. A Money Purchase Keogh Plan requires a fixed percentage of an individual’s compensation to be contributed annually, making contributions mandatory once the plan is established. Conversely, a Profit-Sharing Keogh Plan offers more flexibility, as contributions are discretionary and can vary year-to-year based on business profitability or other factors.

Beyond defined contribution options, a Keogh plan can also be structured as a Defined Benefit Keogh Plan. In this less common arrangement, the retirement benefit is predetermined, often as a fixed monthly payment at retirement. Contributions to a defined benefit Keogh are then actuarially calculated to ensure sufficient funds are available to meet these promised future obligations, placing the investment risk primarily on the plan sponsor rather than the participant.

Key Features and Contribution Limits

Keogh plans offer advantages for eligible individuals, including tax-deductible contributions and tax-deferred growth on earnings. To establish a Keogh plan, an individual must have self-employment income, which means they are a sole proprietor, a partner in a partnership, or work as an independent contractor. Even if employed elsewhere, income from self-employment qualifies for setting up a Keogh.

For defined contribution Keogh plans, the Internal Revenue Service (IRS) sets annual contribution limits. For 2025, the maximum contribution to a defined contribution plan, including Keogh profit-sharing plans, is the lesser of 100% of the participant’s compensation or $69,000. For self-employed individuals, “compensation” is net earnings from self-employment, which is gross income from the business less deductible expenses and half of the self-employment tax. Contributions are typically limited to 20% to 25% of net earnings from self-employment, depending on the calculation method.

Establishing a Keogh plan requires a formal written plan document and, for plans with assets exceeding a certain threshold, annual reporting to the IRS using the Form 5500 series. These administrative requirements ensure compliance with federal regulations, including those under the Employee Retirement Income Security Act (ERISA), to maintain the plan’s tax-advantaged status and ensure proper administration.