What Is a Keogh IRA and How Does It Work?

A Keogh plan is a tax-deferred retirement savings vehicle for self-employed individuals and unincorporated businesses. These plans were established under the Self-Employed Individuals Tax Retirement Act of 1962 to give professionals like doctors and sole proprietors access to retirement benefits similar to corporate pension plans.

While the term “Keogh” is still used, it is an outdated designation, and the IRS now refers to these as qualified plans or HR-10 plans. Legislative changes in 2001 removed most distinctions between plans for the self-employed and those for corporations. Today, individuals often establish SEP IRAs or Solo 401(k)s due to simpler administration, though Keogh structures remain a viable option.

Eligibility for a Keogh Plan

The primary requirement for a Keogh plan is having self-employment income from an unincorporated business, such as a sole proprietorship, partnership, or LLC. Incorporated businesses are not eligible, and the individual must be actively involved in providing personal services to the business.

Eligibility hinges on having “net earnings from self-employment,” which is the gross income from the business minus allowable deductions and one-half of the self-employment taxes paid. This adjusted amount forms the basis for calculating contribution limits.

Individuals classified as common-law employees are not eligible to establish a Keogh plan based on their employment wages. However, an employee with separate self-employment income from a side business can establish a plan based on those earnings. The plan must also be offered to any eligible employees of the business, which includes those at least 21 years old who work 1,000 hours or more per year.

Contribution Rules and Limits

Keogh plans come in two types: defined-contribution and defined-benefit, each with distinct rules. The chosen structure dictates contribution flexibility and limits, and all contributions are pre-tax, allowing for a tax deduction in the year they are made.

Defined-contribution plans are more common and are divided into two types. Profit-sharing plans allow the owner to decide how much to contribute each year, or even skip contributions. Money-purchase pension plans require a fixed percentage of income to be contributed annually as specified in the plan documents. For 2025, the contribution limit for defined-contribution plans is the lesser of 25% of compensation or $70,000, based on net adjusted self-employment income.

Defined-benefit plans function more like traditional pensions and have a benefit limit instead of a contribution limit. For 2025, this limit is the lesser of $280,000 or 100% of the participant’s average compensation for their three highest-paid years. An actuary must calculate the annual contributions required to fund this future benefit, making these plans more complex and costly to administer.

Establishing and Funding the Plan

To set up a Keogh plan, the business owner must first choose between a defined-contribution and a defined-benefit framework. Next, a financial institution, such as a bank or brokerage firm, must be selected to act as the plan custodian or trustee. This institution provides the necessary IRS-approved legal paperwork, such as a prototype plan document or an adoption agreement that outlines the plan’s rules. The business owner completes this agreement to formally establish the retirement trust.

The plan must be established by the end of the tax year, December 31, for contributions to be deductible for that year. While the plan must be created by year-end, funding can occur up until the business’s tax filing deadline, including any extensions. For most sole proprietors, contributions for a given tax year can be made as late as April 15 of the following year, or October 15 if an extension is filed.

Plan Administration and Reporting

Keogh plan administrators have an annual reporting requirement to the IRS and must file a Form 5500-series return each year. For a one-participant plan covering only the business owner or their spouse, the specific form used is Form 5500-EZ.

An exemption exists for smaller plans. If the total assets of a one-participant plan are $250,000 or less at the end of the plan year, filing Form 5500-EZ is not required for that year.

This exemption does not apply in the plan’s final year. A Form 5500-EZ must be filed for the year the plan is terminated and all assets are distributed, regardless of the total asset value. The filing deadline is the last day of the seventh month after the plan year ends, which is July 31 for a calendar-year plan.

Distributions and Rollovers

Distributions taken before the account holder reaches age 59½ are subject to a 10% early withdrawal penalty in addition to ordinary income tax. Exceptions to this penalty can apply in situations such as total and permanent disability or for substantial medical expenses.

Keogh plans are also subject to Required Minimum Distribution (RMD) rules. Plan participants must begin taking annual distributions from their accounts starting at age 73 or 75, depending on their birth year. The first RMD must be taken by April 1 of the year following the year the owner reaches the required age, and subsequent RMDs must be taken by December 31 each year. The amount is calculated based on the account balance and an IRS life expectancy factor.

When a business closes or the owner wishes to consolidate retirement assets, the funds in a Keogh plan can be rolled over into another qualified retirement account, such as a traditional IRA. This non-taxable event allows the funds to continue growing tax-deferred. If the plan is terminated, all assets must be distributed via a direct rollover to avoid immediate taxation and penalties.