Keogh Plan

A Keogh Plan is similar to the concept of a traditional IRA.  A Keogh plan is a retirement plan that allows the investor to defer taxes until retirement.  The difference between the two plans is that Keogh plans are retirement plans for self employed individuals.

Keogh plans allow the individual to make contributions directly from their gross income. Income taxes are deferred until the money is withdrawn from the account. Gains on the account, or interest earned, are also allowed to grow tax-free until withdrawn.

There are two basic kinds of Keogh plans, which are called qualified plans.  The two plan types are:

• Defined Contribution Plans - these plans have defined formulas to determine the amount contributed to the Keogh.  For example, the defined contribution might be based on a percentage of the employee's compensation.
• Defined Benefit Plan - this plan is similar to a pension plan.  It uses actuarial assumptions to calculate the funding needed to provide for a certain level of benefit to the employee in retirement.