In this article, we focus on the Keogh plan and provide a
high-level overview.
Keogh Defined
A Keogh, also known
as an H.R.10 plan, is a qualified retirement plan that can be adopted and
maintained by a self-employed individual (a sole proprietor, a partner in a
partnership or certain fishermen). The term "Keogh" is rarely used by
financial institutions and financial professionals these days. As such,
self-employed individuals who want to establish such a plan would ask about a
defined benefit plan or a defined contribution plan for the self-employed. The
options for defined contribution plans include money purchase pension plans,
profit sharing plans and 401(k) plans.
Features and Benefits Determine Suitability
A self-employed
individual who wants to adopt a Keogh should consider the features and benefits
of each option, and choose the one that is most suitable.The contribution rules
and the cost of maintaining the plan are often the most important features. The
following are highlights of the contribution rules.
Defined Benefit Defined
Contribution
Money Purchase Pension Profit
Sharing 401(k)
Contribution amount
Usually the amount
required to provide an annual benefit that is no more than the smaller of
$205,000 or 100% of the individual’s average compensation for his or her
highest three consecutive calendar years.
The lesser of 100% of
eligible compensation or $51,000.
The lesser of 100% of
eligible compensation or $51,000.
Salary deferral 100%
of compensation up to $17,500, plus an additional $5,500 for individuals who
are at least age 50 by the end of the year.
A profit sharing and
a 401(k) can be combined. In such cases, the contribution is limited to the
lesser of 100% of eligible compensation or $51,000, plus an additional $5,500
for individuals who are at least age 50 by the end of the year. The salary
deferral limit applies.
Are contributions mandatory or discretionary?
Mandatory
Mandatory
Usually discretionary
Discretionary (can
choose whether to defer each year)
Deduction amount
Amount based on
actuarial calculations and assumptions.
25% of eligible
compensation
25% of eligible
compensation
25% of eligible
compensation
Contributions for a
self-employed individual are based on the individual’s modified net business
income. The IRS provides a special worksheet that can be used to calculate
contributions for self-employed individuals. This worksheet is available in IRS
Publication 560 at www.irs.gov.
Roth 401(k) Feature
If allowed under the
plan, a Roth 401(k) feature can be added if the plan is a 401(k) plan. Salary
deferral contributions can be made to the traditional and Roth 401(k) accounts,
or split between both. The aggregate salary deferral contributions must not
exceed $17,500, plus an additional $5,500 for individuals who are at least age
50 by the end of the year. Roth 401(k) salary deferral contributions and
rollovers from other Roth 401(k) or Roth 403(b) accounts are the only types of
contributions that can be made to Roth 401(k) accounts.
Administrative Requirements
Establishing the Plan
A self-employed
individual establishes a qualified plan by completing the adoption agreement by
the end of the year. Once the adoption agreement is completed, it covers the
plan for as long as it is maintained. Amendments to the adoption agreement may
be required if the self-employed individual wants to make changes to the
elective features, and/or if amendments are needed to adopt regulatory and
other mandatory changes.
Contributions
Contributions are
usually required to be made by the individual's tax filing due date, plus
extensions, unless an exception applies. For instance, contributions to defined
benefit plans may need to be made on a quarterly basis, within 15 days after
the end of each quarter
5500 Filing
If plan assets are
more than $250,000 at the end of the year, Form 5500-EZ, or Form 5500-SF if
filed electronically, should be filed for the plan.
Loans
If the plan allows,
loans can be taken, providing the amount does not exceed the lesser of $50,000
or 50% of the plan balance.
Investing Plan Assets
Once contributions
are made to the plan, they are usually invested according to the self-employed
individual’s investment profile - often with the assistance and guidance of a
competent financial advisor. For defined benefit plans, actuarial projections may
affect the design of the investment portfolio.
Portability Rules
Assets can be rolled
over from other retirement accounts, allowing the self-employed individual to
consolidate his or her retirement savings. The following are caveats for
rollover to the plan:
After-tax amounts
cannot be rolled over from a traditional IRA.
Roth IRAs cannot be
rolled over.
If after-tax amounts
are being rolled over from another qualified plan or 403(b), the transaction
must be done as a direct rollover.
If the rollover
amounts are accounted for separately from other plan assets, the plan can allow
those amounts to be withdrawn without any restriction. The terms of the plan
document will dictate when withdrawals can be made from other plan assets.
Choosing the Right Type of Plan
Cost and complexity
and two of the primary features often taken into consideration when choosing a
qualified plan. Defined benefit plans are the most costly to fund and maintain.
This is not only because contribution limits are the highest and are mandatory,
but also because the services of actuaries and third-party administrators are
required to ensure the plans are maintained in compliance with regulatory
requirements.
The discretionary
contribution feature of the profit sharing plan is often an attractive feature
for self-employed individuals, as it allows them to choose each year whether
they want to make contributions to the plan.
The Bottom Line
Self-employed
individuals should consult with a professional who is an expert in the area of
qualified plans, for assistance in ensuring that the plan chosen is the most
suitable
0 comments :
Post a Comment