What Is Another Name for a Keogh Plan?

A Keogh plan once served as a retirement savings vehicle specifically designed for self-employed individuals and unincorporated businesses. This type of plan allowed business owners to save for their retirement with tax advantages, similar to those enjoyed by employees in corporate-sponsored plans. While the term “Keogh plan” is less common today, its underlying purpose and benefits have evolved into other widely used retirement savings options. Understanding these modern equivalents addresses the question of what a Keogh plan is now called.

The Original Keogh Plan

The Keogh plan, also known as an HR-10 plan, was established by Congress in 1962 to provide retirement savings opportunities for self-employed individuals and owners of unincorporated businesses. Its purpose was to offer tax benefits comparable to those available through corporate retirement plans. These plans allowed eligible individuals to contribute a portion of their self-employment income into a retirement account.

Contributions made to a Keogh plan were tax-deductible, reducing the contributor’s taxable income for the year. The funds within the plan also grew on a tax-deferred basis, meaning taxes on investment earnings were postponed until withdrawal in retirement. Keogh plans could be structured as either defined contribution plans, where specific amounts were contributed, or defined benefit plans, which aimed to provide a predetermined retirement payout. The Internal Revenue Service (IRS) no longer uses the term “Keogh plan,” instead referring to them as “qualified plans for self-employed individuals.”

Modern Equivalents and Terminology

While the name “Keogh plan” has largely faded from common use, its function has been assumed by more contemporary and specialized retirement plans for the self-employed. The primary modern equivalents that serve a similar purpose are the Solo 401(k) and the Simplified Employee Pension (SEP) IRA. These plans cater to individuals with self-employment income, including freelancers, independent contractors, and small business owners.

The Solo 401(k), also known as an Individual 401(k) or one-participant 401(k), is specifically designed for business owners with no employees other than themselves or a spouse. This plan allows the business owner to contribute to their retirement in two capacities: as both an employee and an employer. The employee contribution component functions similarly to a traditional 401(k) deferral, while the employer contribution is a profit-sharing contribution from the business.

Conversely, a SEP IRA is a retirement plan utilized by self-employed individuals and small businesses, especially those with few or no employees. With a SEP IRA, only the employer can make contributions to the plan. If a business has eligible employees, the employer must contribute the same percentage of compensation for all eligible employees as they do for themselves. This requirement makes SEP IRAs more suitable for businesses with a limited number of employees, or for sole proprietors.

Key Features of Plans for the Self-Employed

Modern retirement plans for the self-employed, such as Solo 401(k)s and SEP IRAs, share several beneficial characteristics. Both types of plans allow for substantial tax-deductible contributions, which can significantly reduce a self-employed individual’s current taxable income. The investments held within these plans also benefit from tax-deferred growth, meaning earnings are not taxed until they are withdrawn in retirement.

Contribution limits for these plans are much higher than those for traditional Individual Retirement Accounts (IRAs). For a Solo 401(k), contributions are made as both employee salary deferrals and employer profit-sharing contributions. In a SEP IRA, contributions are solely employer-funded, based on a percentage of the self-employed individual’s net earnings.

These plans are less complex to administer compared to traditional corporate retirement plans. While a Solo 401(k) might have slightly more administrative requirements, such as potential annual IRS Form 5500 filings if assets exceed a certain threshold, SEP IRAs are known for their straightforward setup and low maintenance. Eligibility for both plans requires a business owner to have self-employment income, making them ideal for sole proprietors, independent contractors, and single-owner businesses.