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What Is the Difference Between a Keogh and an IRA?

A Keogh plan (pronounced KEE-oh), or HR10, is an employer-funded, tax-deferred retirement plan designed for unincorporated businesses or self-employed persons. Contributions to it must come from net earnings from self-employment. The term itself is outdated. The Internal Revenue Service (IRS) now calls them “qualified plans.”

Key Takeaways

  • Keogh plans are designed for use by unincorporated businesses and the self-employed.
  • Contributions to Keogh plans are made with pretax dollars, and their earnings grow tax deferred.
  • Keogh plans can invest in securities similar to those used by IRAs and 401(k)s.

Two Types of Keogh Plans

The History of the Keogh

IRA vs. Keogh

An individual retirement account (IRA) can be established by any individual saving for retirement, as long as they have earned income that qualifies under IRS rules. For 2019 the maximum contribution is $6,000. For persons age 50 or older, an additional $1,000 in catch-up contributions can be made per year until the year when they are 70½ by the end of the tax year. Employers are not permitted to make contributions on behalf of employees.

Both Keoghs and IRAs require distributions at age 70½, and you can access funds as early as 59½ years of age. 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. 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.

The primary differences between the two plans are contribution limits and individual versus employer contributions. Posttax contributions can be made to IRA accounts, but Keogh contributions offer higher tax deductions. In addition, Keoghs offer plan choices geared toward self-employed individuals or small business owners, whereas IRAs are restricted to individuals.

The Bottom Line

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About Amy Harvey

Amy R. Harvey writes forStartUps Sections In AmericaRichest.

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