Who Were Keogh Plans Designed For & Are They Still Used?

Keogh plans are a type of tax-deferred retirement plan designed for self-employed individuals and unincorporated small businesses. These plans allow individuals to set aside money for retirement with tax advantages, similar to other qualified retirement accounts. The term “Keogh plan” originated from U.S. Representative Eugene Keogh, who championed legislation providing self-employed individuals with retirement planning options. While the IRS now often refers to them as “HR-10 plans” or “qualified plans,” the term “Keogh plan” remains widely recognized.

The Self-Employed and Small Business Owners

Keogh plans were specifically created to address a significant gap in retirement planning for self-employed individuals and small business owners. Before their widespread availability, sole proprietors, partners in unincorporated businesses, and independent contractors often lacked access to robust, tax-advantaged retirement savings vehicles comparable to those offered by large corporations to their employees. Traditional corporate pension plans and early retirement accounts did not adequately serve the unique financial structures and income variability common among the self-employed.

Self-employed individuals faced challenges in saving for retirement due to irregular income streams, the absence of employer-sponsored matching contributions, and limited options for tax-deductible savings. Many were restricted to lower-contribution Individual Retirement Accounts (IRAs), which often did not suffice for their long-term savings goals. Keogh plans were designed to provide these professionals with similar benefits and tax advantages as those working in more traditional employment settings. They were suitable for businesses operating as sole proprietorships, partnerships, or limited liability companies (LLCs) that were not incorporated.

How Keogh Plans Met Their Needs

Contributions made to a Keogh plan were generally tax-deductible, and the investments within the plan grew on a tax-deferred basis until withdrawal in retirement. This tax treatment allowed for significant accumulation of retirement savings over time.

There were primarily two main types of Keogh plans: defined contribution plans and defined benefit plans. Defined contribution Keoghs, which are the most common, include Profit-Sharing Plans and Money Purchase Plans. Profit-Sharing Plans offered flexibility, allowing business owners to vary their contributions annually based on business profits, with a maximum contribution for 2024 of up to $69,000 or 25% of compensation, whichever is less.

Money Purchase Plans, conversely, required a fixed percentage of income to be contributed each year, as specified in the plan documents, offering less flexibility but ensuring consistent savings. The contribution limit for Money Purchase Plans in 2024 was also 25% of annual compensation or $69,000, whichever was lower. Defined benefit Keogh plans functioned more like traditional pension plans, aiming to provide a stated annual benefit at retirement, typically based on salary and years of service. Contributions to these plans were determined actuarially to meet the targeted retirement benefit, and while there were no annual contribution limits, the maximum annual benefit was capped at $275,000 in 2024 or 100% of the employee’s compensation, whichever was lower. While complex, these plans offered high contribution limits, making them attractive for high-income self-employed individuals seeking to maximize their tax-advantaged retirement savings.

Modern Alternatives and Current Relevance

While Keogh plans were historically important for the self-employed, their use has largely been superseded by more modern and often simpler alternatives. Simplified Employee Pension (SEP) IRAs and Solo 401(k)s are now commonly chosen by self-employed individuals due to their ease of establishment, reduced administrative burdens, and competitive contribution limits. A SEP IRA, for instance, functions similarly to a traditional IRA but allows for significantly higher employer contributions, which are tax-deductible. SEP IRAs generally have fewer administrative requirements than Keogh plans and do not typically require annual IRS Form 5500 filings unless assets exceed a certain threshold.

Solo 401(k)s, also known as individual 401(k)s, are particularly popular for self-employed individuals with no employees (other than a spouse). They allow contributions in both an “employee” capacity (salary deferrals) and an “employer” capacity (profit-sharing contributions), potentially enabling higher overall contributions than a SEP IRA for some individuals. For 2025, the combined employee and employer contributions for a Solo 401(k) can be up to $70,000, with an additional $7,500 catch-up contribution for those age 50 or older. Solo 401(k)s also offer the flexibility of Roth contributions, allowing for tax-free withdrawals in retirement, a feature not available with Keogh plans.

Keogh plans still exist and can be maintained as legacy plans, but current tax retirement laws no longer distinguish between incorporated and self-employed plan sponsors as they once did, making the term “Keogh plan” less frequently used by the IRS. While Keogh plans can still be a viable option for some high-income business owners, particularly those seeking a defined benefit plan structure, their higher administrative complexity and costs compared to SEP IRAs and Solo 401(k)s generally make them less attractive for new setups. The requirement to file IRS Form 5500 annually for most Keogh plans, as opposed to simpler reporting for some alternatives, contributes to their declining popularity.