A Keogh plan is a tax-advantaged retirement savings plan designed for self-employed individuals and unincorporated businesses. Once a popular option for small business owners, the Keogh plan has largely been replaced by simpler alternatives such as SEP IRAs and Solo 401(k)s. Remember that tax laws are subject to continual change, and as such, may be change incrementally, retroactively, and without notice.
Today, the Keogh plan is almost exclusively useful for those seeking a defined benefit structure. Unlike SEP IRAs or Solo 401(k)s, which have fixed contribution limits, a defined benefit Keogh plan allows for much higher contribution limits based on factors such as age, salary, and years of employment. For older savers or those nearing retirement, this feature can be a game-changer, allowing for substantial catch-up contributions in a shorter time frame.
Keogh Plans: Two Structures to Know
The Keogh plan offers two possible structures, but only one remains relevant today:
- Defined Contribution Plan (e.g., Profit-Sharing or Money Purchase Plans)
- Similar to a SEP IRA or Solo 401(k), allowing for contributions of up to 25% of self-employment income, with a maximum limit of $66,000 in 2025.
- Rarely used today, as SEP IRAs and Solo 401(k)s offer the same benefits with far less administrative burden.
- Defined Benefit Plan
- A pension-style plan that calculates annual contribution limits based on a formula considering salary, age, and expected retirement benefits.
- This structure allows for substantially higher contributions for older savers or those nearing retirement who need to maximize their savings in a short timeframe.
- Almost exclusively the reason to use a Keogh plan today.
Why Defined Benefit Keogh Plans Stand Out
The defined benefit structure is what sets the Keogh plan apart from other retirement plans. Unlike SEP IRAs or Solo 401(k)s, which have fixed contribution limits based on a percentage of income, a defined benefit Keogh plan calculates the maximum contribution based on a personalized formula. This formula considers:
- Age
- Salary
- Years of service
- Desired retirement income
Because of this calculation, older savers or those nearing retirement can often contribute far more to a Keogh plan than they could with other retirement plans. In some cases, contributions can exceed $200,000 annually, making it one of the most powerful tools for catch-up contributions in the years leading up to retirement.
In the case of a high-earning entrepreneur nearing retirement, a Defined Benefit Keogh Plan could allow for substantially larger contributions than a SEP IRA or Solo 401(k). Unlike the fixed contribution limits of SEP IRAs, contributions to a defined benefit plan are based on a personalized formula that takes into account the participant’s age, compensation, and desired retirement income.
For example, an older individual with a high income could potentially contribute well over $200,000 in a given year, depending on their circumstances. These contributions are calculated annually by an actuary to ensure the plan is adequately funded to meet the promised benefit.
Why Use a Keogh Plan Today?
In almost all cases, SEP IRAs or Solo 401(k)s will be more than sufficient for most self-employed individuals. These plans are:
- Simpler to administer
- More flexible
- Cost-effective to maintain
However, a defined benefit Keogh plan can be a powerful tool for:
- Older savers or those nearing retirement who want to maximize tax-deferred savings
- Those with a short time horizon to retirement who need to accelerate contributions
For this group, the defined benefit Keogh plan can make a significant difference in retirement readiness.
Benefits of a Defined Benefit Keogh Plan
- Higher Contribution Limits: Allow for significantly higher contributions compared to SEP IRAs or Solo 401(k)s for older savers or those nearing retirement.
- Tax Advantages: Contributions are tax-deductible, reducing taxable income.
- Retirement Security: Structured to provide a guaranteed retirement benefit, similar to a pension.
Drawbacks of a Keogh Plan
Despite the advantages of the defined benefit structure, Keogh plans come with some downsides:
- Administrative Complexity
Defined benefit Keogh plans require actuarial calculations to determine contribution limits and future liabilities. These calculations must be reviewed annually, which can be costly and time-consuming. - Required Contributions
Contributions to a defined benefit Keogh plan are mandatory once the plan is established. Unlike SEP IRAs or Solo 401(k)s, where contributions can vary from year to year, the Keogh plan requires fixed annual contributions, regardless of business performance. - Obsolescence of Defined Contribution Keogh Plans
The defined contribution version of the Keogh plan has no clear advantage over SEP IRAs or Solo 401(k)s. As a result, it is rarely used today.
Conclusion
The Keogh plan has become largely obsolete in its defined contribution form. For most self-employed individuals, SEP IRAs or Solo 401(k)s provide simpler, more flexible retirement savings options with similar tax benefits.
However, for older savers or those nearing retirement who want to maximize tax-deferred savings through a defined benefit structure, the Keogh plan remains one of the best options available. It allows for much higher contributions than other plans and can help make significant catch-up contributions in the years leading up to retirement. For this group, a defined benefit Keogh plan is almost exclusively the reason to consider a Keogh today.
