Keogh Plans Were Designed for Self-Employed Workers and Small Business Owners
A Keogh plan is a tax-deferred retirement account created in 1962 specifically for people who work for themselves or own a small business. Unlike employees who get a 401(k) through their employer, self-employed people had no equivalent way to save for retirement with a tax break — so Congress created the Keogh to fill that gap. The plan lets you set aside a portion of your business income and defer taxes on it until you withdraw the money in retirement.
The original audience was straightforward: sole proprietors, partners in partnerships, and S-corporation owners who had no other retirement savings vehicle. A freelance consultant, a plumber running their own shop, or a doctor in a small practice could all use a Keogh. The plan was named after Eugene Keogh, a congressman from New York who sponsored the legislation.
Today, Keogh plans still exist but are less common than they were decades ago. Simpler alternatives like the SEP-IRA and the Solo 401(k) have taken over much of the market because they require less paperwork and administration. But the Keogh remains available and is still used by some self-employed people and small business owners, particularly those with higher incomes who want to save the maximum amount.
Key Takeaways
- Keogh plans were created for self-employed people and small business owners who had no employer-sponsored retirement plan.
- You can only open a Keogh if you have self-employment income from a business you own or operate.
- Keogh plans come in two main types: defined-contribution plans (where you set aside a percentage of income) and defined-benefit plans (where you commit to a specific retirement payout).
- Contribution limits are higher than many other retirement accounts, but the plans require more record-keeping and annual filings with the IRS than newer alternatives like SEP-IRAs.
The Two Types of Keogh Plans and Who Used Each
Keogh plans come in two structures, and the choice depended on what kind of retirement security a business owner wanted. The defined-contribution Keogh (also called a profit-sharing Keogh) lets you set aside a percentage of your net self-employment income each year — typically up to 20 percent, though the exact limit depends on how the plan is structured. This type appealed to owners whose income varied year to year, because you could contribute more in good years and less in lean years.
The defined-benefit Keogh works differently: you commit to paying yourself a specific amount in retirement, and you calculate how much to contribute each year to reach that goal. This type was popular with older business owners or those with high, stable income who wanted to set aside large sums quickly. A defined-benefit Keogh required actuarial calculations and more complex administration, so it was typically used by established businesses with consistent earnings.
Both types allowed you to exclude employees from the plan under certain conditions, though if you did cover them, you had to contribute the same percentage of their salary as you contributed for yourself. This made Keogh plans more expensive to maintain if you had staff, which is one reason simpler plans eventually became more popular.
Why Keogh Plans Fell Out of Favor
When the Keogh was created in 1962, it was the only retirement savings tool available to self-employed people. But over the decades, simpler alternatives emerged. The SEP-IRA, introduced in 1978, let you contribute up to 25 percent of net self-employment income with almost no paperwork. The Solo 401(k), created in the 1990s, offered even more flexibility and higher contribution limits for business owners with no employees.
Keogh plans require you to file Form 5500 with the IRS every year if the plan has more than $250,000 in assets, and you must maintain detailed records of contributions, investments, and distributions. You also have to adopt a formal written plan document and follow strict rules about when and how you can withdraw money. For a freelancer or small shop owner, this administrative burden often outweighed the benefits.
Today, most financial institutions no longer actively market Keogh plans or make them easy to open. If you already have one, you can keep it. If you are self-employed and looking to open a new retirement account, a SEP-IRA or Solo 401(k) will likely be simpler and just as effective for your situation.
Who Can Still Open a Keogh Plan Today
You can open a Keogh plan if you have net self-employment income from a business you own. This includes sole proprietors, partners in a partnership, and S-corporation owners who receive W-2 wages and have business profits. You cannot open a Keogh if you are a W-2 employee, even if you have side income from freelance work — the side income must come from a business structure (sole proprietorship, partnership, or S-corp) to count.
The deadline to open a Keogh for a given tax year is the date you file your tax return, including extensions. So if you file your 2024 taxes in October 2025 (with an extension), you can still open a Keogh and make contributions for 2024. This is different from some other retirement accounts, which have earlier deadlines.
If you have employees, you must include them in the plan under certain rules. Specifically, you must cover any employee who is at least 21 years old, has worked for you for at least one year, and works at least 1,000 hours per year. This requirement is one reason many small business owners choose a SEP-IRA or Solo 401(k) instead, since those plans have more flexibility around employee coverage.
Contribution Limits and Tax Treatment
For a defined-contribution Keogh, you can contribute up to 20 percent of your net self-employment income (after adjusting for the self-employment tax deduction). The IRS sets an annual dollar cap on contributions; in recent years this cap has been in the range of $66,000 to $69,000, but it changes yearly. For a defined-benefit Keogh, there is no percentage limit — you calculate contributions based on the retirement income you want to receive, subject to an annual dollar maximum (also adjusted yearly).
Contributions to a Keogh are tax-deductible in the year you make them, which reduces your taxable income. The money grows tax-deferred inside the account, meaning you pay no tax on investment gains while the money is in the plan. You pay income tax on withdrawals in retirement, at whatever tax rate applies then.
If you withdraw money before age 59½, you generally owe a 10 percent early-withdrawal penalty plus income tax on the amount withdrawn. There are some exceptions — for example, if you become disabled or face a financial hardship — but they are narrow and require documentation. You must begin taking withdrawals by age 73 (as of 2023, under current rules), and the IRS calculates a minimum amount you must withdraw each year.
Keogh Plans Versus SEP-IRAs and Solo 401(k)s
| Feature | Keogh Plan | SEP-IRA | Solo 401(k) |
|---|---|---|---|
| Who can open it | Self-employed, business owners | Self-employed, business owners | Self-employed, business owners with no employees |
| Annual IRS filing required | Yes (Form 5500 if over $250,000) | No | Yes (Form 5500-C/R if over $250,000) |
| Contribution limit (2024) | Up to 20% of net self-employment income, capped at ~$69,000 | Up to 25% of net self-employment income, capped at ~$69,000 | Up to 66% of net self-employment income, capped at ~$69,000 (employee deferral) plus employer contribution |
| Employee coverage required | Yes, if you have may be able to access employees | Yes, if you have may be able to access employees | No (plan is for owner only) |
| Loan option | No | No | Yes |
| Ease of setup and maintenance | Moderate to high complexity | Very simple | Moderate complexity |
For most self-employed people today, a SEP-IRA is the easiest choice. It has no annual filing requirement, allows contributions up to 25 percent of net self-employment income, and takes minutes to open at most banks or investment firms. If you have employees, you must contribute the same percentage for them as for yourself, but there is no complex plan document to maintain.
A Solo 401(k) is a good fit if you have no employees and want to save more than a SEP-IRA allows, or if you want the option to borrow against your retirement savings. It requires more paperwork than a SEP-IRA but less than a Keogh, and many providers have streamlined the process.
A Keogh makes sense only if you already have one and want to keep it, or if you have very specific needs that the other two plans do not meet — which is rare. If you are opening a new retirement account as a self-employed person, start with a SEP-IRA or Solo 401(k).
Frequently Asked Questions
Can I have both a Keogh plan and a SEP-IRA?
No. You cannot maintain both a Keogh and a SEP-IRA in the same year for the same business. If you have a Keogh and want to switch to a SEP-IRA, you can close the Keogh and open the SEP-IRA, but you cannot run both simultaneously. The IRS treats them as overlapping retirement plans for the same self-employment income.
What happens to my Keogh if I stop being self-employed?
You can keep the Keogh and let it sit, but you cannot make new contributions once you no longer have self-employment income from that business. The money already in the account continues to grow tax-deferred. You can roll it over to an IRA or another retirement account if you want to consolidate, or you can leave it where it is and take distributions according to the plan rules.
Do I have to contribute to my Keogh every year?
For a defined-contribution Keogh, no — contributions are optional and can vary year to year. For a defined-benefit Keogh, yes — you must contribute enough each year to stay on track to pay the retirement benefit you promised yourself. This is one reason defined-benefit Keoghs are less popular; they lock you into a contribution schedule.
Can I withdraw money from my Keogh before retirement?
You can withdraw money, but you will owe income tax on the amount plus a 10 percent early-withdrawal penalty if you are under 59½. Some exceptions exist — disability, medical expenses, or a loan from the plan (if your plan document allows it) — but they are limited. Most people leave Keogh money untouched until retirement to avoid the penalty.
Is a Keogh plan still worth opening in 2024?
Probably not, unless you have a specific reason. A SEP-IRA or Solo 401(k) will give you the same or better tax benefits with much less paperwork. Talk to a tax professional or financial advisor about which plan fits your income level and business structure, but for most self-employed people, the simpler alternatives are the better choice.