Keogh Plans

Keogh plans are retirement plans for self-employed individuals, e.g. sole proprietors, partners in a partnership1, and employees of either. The differences between Keogh plans an corporate sponsored plans are small and are limited to different treatment of life insurance.

The Basics of Keogh Plans

• Plan Type: A Keogh plan may be either a defined contribution plan or a defined benefit plan.
• Defined contribution plans: Contributions for individual participants may not exceed the lesser of 100% of includable compensation2 or $44,000 per year. At the employer level, no more than 25% of the covered compensation of all participants may be deducted. Thus, if the Keogh plan covers only one participant, the effective contribution limit becomes 25% of the net after-contribution income of the business owner,3 not to exceed $44,000.
• Benefit limits: Defined benefit Keogh plans are subject to the same percentage of average compensation and dollar limits that apply to all defined benefit plans. For 2006, these figures are 100% and $175,000.
• Framework: Ma use a trust, a custodial account or an insurance company annuity.
• Evidence of plan: The plan must be in writing and meet certain coverage and non-discrimination requirements for present and future employees.
• Distributions: Distributions prior to age 591/2 (other than for disability or death) are subject to both a 10% penalty and current income tax. However, if an employee terminates service on or after age 55,4 or receives a series of substantially-equal periodic payments based on his or her life expectancy (or joint life expectancy with a desitnated beneficiary), the penalty is avoided. For more than 5% owners, distributions must begin when the participant reaches age 701/2.
• Available payment plans: Lump-sum distribution Lifetime of the participant(and spouse if desired) Fixed period of years not to exceed the participant’s life expectancy or the joint life expectancy of the participan and a designated beneficiary (see IRC Sec. 401(a)(9))
• Other plans: A participant in a Keogh plan may also have a traditional, deductible IRA (subject to certain income level limitations based on filing status), a traditional, nondeductible IRA or a Roth IRA.
• Taxation: Distributions are generally taxed as ordinary income. Special 10-year income averaging may be available for certain individuals.5
• 401(k) feature: A 401(k) feature may be added, if desired, to a profit sharing plan.
Allocation methods: The same kinds of allocation methods that are available under a corporate-sponsored defined contribution plan are also available under a Keogh plan. These can be age-weighted, tiered or integrated with Social Security.
• Participants loans: Participant loans are permitted without any adverse consequences, provided they follow the regular rules for participant loans.
• Top-heavy defined contribution plans: If more than 60% of plan assets are allocated to key emplyees6, the employer must contribute at least as much for non-key participants as it does for key employees. This requirement applies only to a contribution of up to the first 3% of includable compensation (higher in some instances).
• To-heavy defined benefit plans: If more than 605 of the accrued benefits are attributable to key employees6, the plan must provide a minimum level of retirement benefits. This is 2% of compensation at retirement for each year of participation, not to exceed 10 years (20%).
• Federal bankruptcy law: Effective 10/17/05, federal bankruptcy law provides significant protection from creditors to participant accounts or accrued benefits in tax-exempt retirement plans.

Securities offered through
Ogilvie Security Advisors, Corp.
900 N. Michigan Avenue Suite 1860, Chicago, IL 60611
(312) 335-5476
Member NASD/SIPC