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What's a Keogh plan?

Before a tax law change in 2001, Keogh plans were a popular choice for high-income self-employed people. These days, they've been largely replaced by SEP IRAs, which have the same contribution limits but much less paperwork.

Keogh plans come in two varieties:

Defined-contribution. These plans have two variations: profit-sharing and money-purchase. The profit-sharing version of the Keogh is most like the SEP; there's a ceiling on contributions - 25% of compensation, up to a maximum contribution of $49,000 in 2010 - and below that limit you can put in whatever you can spare. You also can change your contribution each year. With the money-purchase plan, you pick a percentage of income you'll contribute every year, and stick with it. If you don't, you'll owe the IRS a penalty.

Defined-benefit. This type of Keogh acts as a traditional pension plan, but for one key fact: you fund it yourself. You pick the annual pension you want, then contribute (and deduct from your taxes) whatever amount is needed to reach that goal. If you're self employed and have a high income - say you're a doctor or lawyer - this type of plan may allow you to save more for retirement than many other plans.

Keoghs can be complicated to set up, and the paperwork required if you own one is considerable. If you're interested in establishing a Keogh, consult a financial adviser.

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