Question

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

Answer 1

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

Keogh plans can be established in addition to IRA accounts, but since a Keogh plan is a qualified plan, your contributions to your IRA account may not be fully deductible. Additionally, if you work as an employee and participate in the employer's qualified plan, you can still have a Keogh plan if you have net earnings from self-employment. Your contributions are subject to the overall limitations for defined contribution plans and defined benefit plans.

Notes:-

1. Keogh plans must be set up by the end of the year to claim a tax deduction for contributions for that year. But you have until the due date of your tax return (including extensions) to actually make your contribution.
2. If an individual has self-employment income (typically consulting, director's fees, etc.) and is a non-owner employee (or has very little ownership) of another company, he or she could have a separate retirement plan for their self-employment income (but could not double up on 401(k) contributions).

How Keogh Plans Work

If you are self-employed, you can establish a Keogh (a qualified retirement plan) with contributions based on net earnings from self-employment. Contributions to Keogh plans are tax-deductible. The amount of the contribution depends on the type of plan you set up—either "defined contribution" or "defined benefit." No matter what type of plan you select, you must fund the Keogh of your eligible employees; i.e., you must make contributions to the Keogh plan for your eligible employees. For the employee eligibility rules, see the section Establishing a Keogh Plan. An overview of Keogh plan rules follows.

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Financial Answer Center > Investing For Retirement
Keogh Plans

Introduction
Can You Have Both a Keogh Plan and an IRA?
Defined Contribution or Defined Benefit?

Can You Have Both a Keogh Plan and an IRA?
Keogh plans can be established in addition to IRA accounts, but since a Keogh plan is a qualified plan, your contributions to your IRA account may not be fully deductible. Additionally, if you work as an employee and participate in the employer's qualified plan, you can still have a Keogh plan if you have net earnings from self-employment. Your contributions are subject to the overall limitations for defined contribution plans and defined benefit plans.

IMPORTANT NOTE: Keogh plans must be set up by the end of the year to claim a tax deduction for contributions for that year. But you have until the due date of your tax return (including extensions) to actually make your contribution.

IMPORTANT NOTE: If an individual has self-employment income (typically consulting, director's fees, etc.) and is a non-owner employee (or has very little ownership) of another company, he or she could have a separate retirement plan for their self-employment income (but could not double up on 401(k) contributions).

How Keogh Plans Work

If you are self-employed, you can establish a Keogh (a qualified retirement plan) with contributions based on net earnings from self-employment. Contributions to Keogh plans are tax-deductible. The amount of the contribution depends on the type of plan you set up—either "defined contribution" or "defined benefit." No matter what type of plan you select, you must fund the Keogh of your eligible employees; i.e., you must make contributions to the Keogh plan for your eligible employees. For the employee eligibility rules, see the section Establishing a Keogh Plan. An overview of Keogh plan rules follows.

Defined Contribution Plans

Defined contribution plans are the most common type of Keogh plan, and include money-purchase pension plans and profit-sharing plans. There are overall contribution and deduction limitations to a Keogh plan.

For both types of plans, contributions in 2020 are generally limited to the lesser of $57,000 ($56,000 in 2019) or 25% of your self-employment income, after the retirement contribution is subtracted.

As the self-employed owner, you may be able to deduct up to 25% of the combined compensation of all eligible employees.

The contribution and the deduction for the contribution to your own Keogh are computed after you subtract your retirement plan contribution from your net earnings. This means that you can't actually put 25% of your self-employment income into your retirement plan. Effectively, you can put only 20% of your self-employment income into your plan. For example, if your self-employed income is $30,000 (net of ½ of the self-employment tax), you can contribute $6,000 ($30,000−$6,000 = $24,000 x 25% = $6,000; or $30,000 x 20% = $6,000) to your retirement plan.

Defined Benefit Plans

A defined benefit plan provides individuals with specified benefits at retirement, typically in the form of a monthly retirement benefit and typically based on levels of compensation and years of service. If you set up a defined benefit plan, you will need an actuary to calculate the amount necessary to fund the plan.

General Types of Keogh Plans¹

Type	Maximum Contribution2	Factors to Consider
Money-Purchase	$57,000 in 2020 ($56,000 in 2019) or 25% of the earned income2 from the business, whichever is less	Contributions are required. You are locked into a specified percentage each year.
Profit-Sharing	$57,000 in 2020 ($56,000in 2019) or 25% of the earned income3 from the business, whichever is less	Your contributions are flexible, up to the maximum percentage you initially set.
Defined Benefit	The plan funds for a fixed annual income at retirement.4	Allows older workers to put away substantially more money, but younger workers may not be able to put away as much as in a money purchase or profit-sharing plan. Also, there are higher administrative costs with a defined benefit plan. (Rewards older, longer-service employees over younger, short-term employees.)

^{1 Assumes you are an owner-employee.}

^{2 The employer must make a contribution to each eligible employee's account. This contribution is not currently taxable to the employee, but is taxed upon withdrawal.}

^{3 Your earned income equals your income minus the retirement contribution and minus ½ of the self-employment tax.}

^{4 The maximum defined-benefit you can fund is set annually by the IRS.}

^{Your Keogh contributions are deductible on your individual income tax return. Deduct the contributions for your employees on Schedule C (or Schedule F if applicable) on your Form 1040. Take the deduction for contributions for yourself on page 1 of Form 1040 under the section Adjusted Gross Income.}

^{Defined Contribution or Defined Benefit?
You need to consider these factors when selecting the right type of Keogh:}

• ^{How much money you need to accumulate}
• ^{Your age}
• ^{Your cash flow—i.e., whether you can put money into the plan every year (for employees, too)}
• ^{The administrative cost of the different plans}

^{A defined benefit plan is attractive to older self-employed individuals who are just starting a plan because it allows greater contributions for older plan participants. Keep in mind, you will need an actuary to calculate the amount necessary to contribute to the plan. The cost of continuing professional assistance must be factored into the decision. Also, you may have to make quarterly installments of required contributions if certain participant notification requirements are not met.}

Generally, if you are young, a defined contribution plan allows you to make a greater contribution to your Keogh plan than does a defined benefit plan. Of the defined contribution plans, a money purchase pension plan requires you to contribute (contributions must be made for you and your employees) to the plan each and every year, regardless of how good or bad your business is doing. So, you need to have sufficient cash flow to support the contributions each year.

On the other hand, a profit-sharing plan is more flexible. Contributions can be any amount up to 25% of the total eligible payroll of plan participants. Plan contributions can be omitted entirely in a bad year. But the IRS does require that contributions be "substantial and recurring" so that the plan is not terminated.

Establishing a Keogh Plan

If you are self-employed, you can establish a Keogh plan for yourself. If you have employees, you must make contributions to the plan for them if they meet the minimum participation requirements (or the requirements of your plan, if more lenient). As the employer, you are responsible for establishing and maintaining the plan.

Written Plan Requirement

A written plan instrument is required for a qualified Keogh plan. All provisions of the plan must be expressly stated in the document. Most plans follow a standard master or prototype plan already approved by the IRS. You can adopt such a plan as offered at most financial institutions, including banks, insurance companies, and mutual fund companies. An individually designed plan can also be established, but IRS approval will be required.

Minimum Participation Requirements

An employee must be allowed to participate in your plan if he or she meets these conditions:

• Has reached age 21
• Has at least one year of service (two years if the plan provides that the employee has an immediate, fully vested (non-forfeitable) right to all of his or her benefit under the plan)

Setting up a Keogh

Financial institutions have prototype plan documents that can easily be completed. A trustee must generally be designated and holds title to plan assets, and is responsible for managing them unless this responsibility has been delegated to an investment manager. Where you decide to go should be based on the type of investments you want.

Investment concepts for Keoghs are similar to those for IRAs. Speak with your financial professional to select the investments that are right for you.

Tax Reporting Requirements

An annual filing must be made with the IRS for Keogh plans. The annual report for a plan is generally made on a Form 5500 (Annual Return/Report of Employee Benefit Plan). Reports are generally due seven months after the end of the plan year (July 31 for calendar year plans).

If your Keogh plan covers only you, or you and your spouse if you jointly own a business, you can file Form 5500-EZ, Annual Return of One Participant (Owners and Their Spouses) Retirement Plan.

The biggest difference between a Roth and a traditional IRA is how and when you get a tax break: The tax advantage of a traditional IRA is that your contributions are tax-deductible in the year they are made. The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.