How to Set Up a Keogh Plan

A Keogh plan is an attractive recruiting tool, because it allows one of the highest contribution levels available among employer-sponsored investment plans.

Difficulty:

Moderately Challenging

Instructions

Things You'll Need

• Banks
• Brokerage Accounts

1. Determine whether you are eligible to set up a Keogh. If you have any income from self-employment, even from a small side business, you're eligible.

2. Decide which plan you will use. A defined benefit plan provides for a predetermined retirement benefit but is very complex to set up and administer. A defined contribution plan benefit depends on how much is contributed in an employee's name and how well the investment performs.

3. Obtain forms to set up a Keogh from your bank, brokerage house, mutual fund company or insurance agency. If you want to set up a custom plan, seek the help of a professional financial advisor. Regardless of the type of plan, it must be in writing.

4. Present the written plan to your employees. Present all the provisions of the plan ' contribution requirements, eligibility requirements and distribution guidelines.

5. Choose a plan administrator who will file the required forms with the Internal Revenue Service and Department of Labor, keep records and provide ongoing written communication to employees.

6. Make contributions to the plan according to the plan guidelines.

Tips & Warnings

• If you set up a Keogh plan and you have employees, the eligible employees must be allowed to participate. Standard eligibility requirements are that the employee be 21 years of age, have worked for the company for the past two years and have 1,000 hours of service during each of those years, but you can allow all employees to participate if you wish.

• A Keogh must be set up by December 31 of the year you'd like to begin investing, but employer contributions do not have to be made until the filing deadline of your company's tax return, including any extensions.

• The employer is allowed to make tax-deductible contributions of up to the smaller of $30,000 or 25 percent of an employee's earnings. Employees cannot make tax-deductible contributions, but the plan can sometimes be set up so that an employee can make nondeductible contributions. In either case, the earnings from the plan are allowed to grow tax-free until distributions are made.

• Distributions are taxed at the same rate as distributions from any other qualified benefit plan. Distributions are allowed when the employee reaches 59 1/2 years of age or in special circumstances such as death, disability, separation from service or financial hardship.

• Consult with a financial advisor before setting up any investment plan. He or she will have the latest information regarding investment plans and can help you choose the one best suited for you and your employees.

• Keogh plans have several specific transactions that are considered prohibited and that are taxed at rates of up to 100 percent. One such transaction is a loan from the plan to a self-employed individual.

• Keogh plans require a lot of paperwork and adherence to federal filing and notice regulations. If you go with a Keogh, consider using a professional administrator.