Keogh (HR-10) Plans (20.2-20.2.2)

Employee Retirement Income Security Act (ERISA)

Act that established uniform minimum standards for employer-sponsored retirement and health and welfare benefit programs. - Determines if the employer-sponsored plan is qualified if it meets these standards

Eligibility for Keogh Plans

Employee participation in a Keogh plans is subject to these rules: 1) Full-time employees - employees who receive compensation for at least 1,000 hours of work per year 2) Tenured employees - employees who have completed one or more years of continuous employment 3) Adult employees - employees 21 years of age and older, but not older than 70.5 Employee must be all three of these.

Similarities between Keoghs and IRAs

Both of these plans are designed to encourage individuals to set aside funds for retirement income. 1) Both are tax advantaged - but IRA does not involve employer contributions - IRA is not qualified by ERISA Similarities include: 1) Tax deferral of contributions - taxes are deferred on contributions until the individual receives distributions 2) Tax Sheltered - investment income and capital gains are not taxed until withdrawn - once withdrawn are subject to taxation at ordinary income rates 4) Contributions - only cash my be contributed to a plan - in the event of a rollover or transfer, cash and securities from transferring account may be deposited 5) Distributions - can begin as early as age 59.5 without penalty 6) Penalties For Early Withdrawal - individual pays income tax on total amount withdrawn, plus 10% penalty - permitted without penalty in the event of death or disability 7) Payout Options - distributions in lump sum or periodic payments 8) Beneficiary - upon plan holder's death, payments are made to a designated beneficiary (or beneficiaries)

Owner-Employee

Category of people intended for Keogh plans. - refers to sole proprietors

Self-Employed

Category of people intended for Keogh plans. Includes: - contractors - consultants - freelancers - anyone else who files and pays self-employment Social Security taxes

Contributions to Keogh Plans

Contributions to Keogh plans are significantly higher than IRA limits. - $53K may be contributed on behalf of a participant - those eligible for a Keogh may also maintain an IRA - employees of a business must be covered at the same contribution percentage as the owner for the plan to be nondiscriminatory Only earnings from self-employment count towards determining maximum contribution level.

Non-Tax-Deductible Contributions

Keogh plan participant may make contributions that are: 1) tax-deductible and 2) Non-tax-deductible - income and capital gains accumulate tax free until withdrawn If the voluntary contribution results in a total contribution that exceeds the annual max, - excess may be subject to a penalty tax

Qualified Plan

Refers specifically to an employer-sponsored plan, not an IRA

Keogh Plans

These are Employee Retirement Income Security Act qualified plans intended for - self-employed individuals - owner-employees of unincorporated business concerns, or professional practices