Question

• Can you establish a KEOGH retirement plan even if you are covered by a corporate retirement in your primary job?
• If the owner of a Keogh plan dies, what happens to the funds in the Keogh?
• Can you have a Keogh and an IRA plan or even a Roth IRA?

Answer 1

Keogh Plan

The Keogh plan or HR 10 plan (more commonly referred to today as a qualified or profit-sharing plan) is arguably the most complex of the plans intended for self-employed workers, but it is also the option that allows for the most potential retirement savings.

How It Works

Keogh plans usually can take the form of a defined-contribution plan, in which a fixed sum or percentage is contributed every pay period. In 2020, these plans cap total contributions in a year at $57,000. Another option, though, allows them to be structured as defined-benefit plans. In 2019, the maximum annual benefit was set at $230,000 or 100% of the employee’s compensation, whichever is lower.

When you are covered under Keogh Plan?

A business must be unincorporated and set up as a sole proprietorship, limited liability company (LLC), or partnership to use a Keogh. Although all contributions are made on a pretax basis, there can be a vesting requirement.

As you might imagine, these plans are mainly beneficial to high earners, especially the defined-benefit version, which allows greater contributions than any other plan. A Keogh is best suited for firms with a single high-earning boss or two and several lower-earning employees—as in the case of a medical or legal practice.

Setting It Up

Keogh Plans have federal filing requirements, and the paperwork and complexity often mean that professional help (be it from an accountant, investment advisor, or a financial institution) is necessary. Your options for custodians may be more limited than with other retirement plans—you’ll probably need a brick-and-mortar institution rather than an online-only service. Charles Schwab is one brokerage that offers and services these sort of plans.

if the owner of a Keogh plan dies, what happens to the funds in the Keogh?

Keoghs become invalid when the plan documents aren’t amended to reflect periodic changes in federal law. This happens far more often than plan owners or their advisers realize. When a Keogh is invalid, contributions and earnings become taxable, and plan rollovers into IRAs become illegal. Often, the problem surfaces when the client dies.

Technically, a one-person Keogh expires with its owner. In order to postpone income taxes on plan assets, the beneficiaries must roll them into IRAs. But rollovers aren’t permitted unless the Keogh is valid.

Can you have a Keogh and an IRA plan or even a Roth IRA?

 You can also convert a Keogh into an IRA (traditional or Roth), but you must roll over the funds you remove from a Keogh within a 60-day window to avoid being hit with taxes and potential penalties for early withdrawal.Both Keoghs and IRAs require distributions at age 70½, and you can access funds as early as 59½ years of age

 It's best to do this with a direct transfer, trustee-to-trustee. If you're moving Keogh money to a Roth, there may also be taxes due—check with a tax advisor before making any changes, and also to be sure that all relevant tax forms are properly filed for the Keogh.