Keogh plan: what it is, how it works and what replaced it

A Keogh plan is a qualified retirement plan set up by a self-employed person or an unincorporated business, such as a sole proprietorship or partnership. The name is a holdover from the 1960s legislation that first let the self-employed have tax-favored plans, and the IRS still notes that qualified plans covering self-employed individuals are sometimes called Keogh or H.R. 10 plans. In practice, a "Keogh" today is usually a profit-sharing plan, a money purchase pension plan or a defined benefit plan adopted by a business owner who files a Schedule C or receives partnership income.

You will still see the term on old account statements, in plan documents and in exam syllabuses, which is why people search for it. This guide explains where the name came from, what types of plan sit under it, how contributions are calculated for a self-employed owner, and how a Keogh compares with the plans most sole proprietors open now.

Where the name comes from

Before 1962, employees of corporations could be covered by tax-qualified pension and profit-sharing plans, but self-employed people could not. The Self-Employed Individuals Tax Retirement Act of 1962, introduced as bill H.R. 10 and associated with Representative Eugene Keogh of New York, created a separate set of rules allowing the self-employed to set up their own qualified plans. Those plans picked up both names: Keogh plans and H.R. 10 plans.

For two decades the self-employed rules were stricter than the corporate ones, with lower limits and extra restrictions. Later legislation in the early 1980s brought the two regimes broadly into line, so that a plan covering a self-employed owner is now subject to essentially the same qualification rules as a plan sponsored by a corporation. Once that happened, the separate label mattered much less, and the industry gradually stopped using it.

That history explains why the word survives mostly as shorthand. There is no distinct "Keogh" plan type in the tax code today. There are qualified plans, and some of them happen to be sponsored by self-employed people.

The plan types that count as Keogh plans

When someone refers to a Keogh, they almost always mean one of three structures. The differences come down to whether contributions are flexible or required, and whether the plan promises a contribution or a benefit.

Plan type	What is promised	Contribution flexibility	Typical fit
Profit-sharing plan	A share of contributions, decided each year	Flexible; can be zero in a lean year	Owners with uneven income
Money purchase pension plan	A fixed contribution percentage set in the plan document	Required every year at the stated rate	Rare now; once used to reach higher limits
Defined benefit plan	A specified retirement benefit	Required each year at an actuarially determined amount	High earners who want to contribute large sums

Profit-sharing Keogh. The owner decides each year how much to contribute, up to the deduction limit. Nothing is required, which suits fluctuating income. Our guide to the profit-sharing plan covers the employer version in detail, and the mechanics are the same for a sole proprietor.

Money purchase Keogh. The plan document fixes a contribution rate, and the owner must contribute that amount every year or face a minimum funding problem. Historically, owners paired a money purchase plan with a profit-sharing plan to reach a higher combined deduction than profit-sharing alone allowed. Since the profit-sharing deduction limit was raised in the early 2000s, a profit-sharing plan or solo 401(k) can usually reach the same overall limit on its own, so new money purchase plans are uncommon.

Defined benefit Keogh. Instead of contributing a percentage of earnings, the owner funds a target pension, with the required contribution worked out by an actuary. Older owners with high, stable income can often contribute much more than a defined contribution plan allows. The tradeoff is cost, rigidity and mandatory funding. See our explainers on the defined benefit plan and the cash balance plan, a hybrid version popular with professional practices.

How contributions work for a self-employed owner

This is where Keogh plans differ in practice from employee plans, and where most of the arithmetic mistakes happen.

An employee's contribution is based on W-2 wages. A self-employed owner has no W-2 wages from their own unincorporated business. Instead, the plan uses earned income, which for a sole proprietor starts from net earnings from self-employment on Schedule C (or partnership income from self-employment) and is then reduced by two items:

1. The deduction for one-half of self-employment tax.
2. The plan contribution itself.

The second reduction creates a circular calculation. A plan that sets the contribution at a percentage of compensation produces a lower effective rate for the owner than the plan rate suggests, because the contribution reduces the base it is calculated on. IRS Publication 560 provides a rate table and worksheet to solve this. The well-known result is that a plan with a stated 25% rate produces an effective rate of 20% of net earnings after the self-employment tax deduction for the owner.

Here is an illustrative example using simple assumed figures, not current IRS limits:

• Net profit from Schedule C: $100,000
• Assume the deductible half of self-employment tax is about $7,000
• Base after that deduction: $93,000
• Plan contribution rate stated in the plan: 25%
• Effective owner rate: 20%
• Illustrative maximum contribution: about $18,600

Those numbers are rounded for clarity. The actual self-employment tax depends on the year's rules, and the contribution is also capped by the annual IRS limits on compensation and on total annual additions, which change every year. Use the Publication 560 worksheet or tax software for real figures, and verify the current limits before acting.

Contributions for the owner are deducted on Form 1040 (Schedule 1), not on Schedule C. That keeps them from reducing self-employment tax, which is a point some people expect but which the rules do not allow.

Employees and the coverage rules

A Keogh is a qualified plan, so if the business has eligible employees, the plan must cover them under the same nondiscrimination and coverage rules that apply to any employer plan. In practice, that usually means contributing for employees at the same percentage of pay as for the owner, after allowing for the different compensation base. Plans can apply age and service requirements within IRS limits before an employee becomes eligible.

This is one reason sole proprietors with staff often look elsewhere. A SEP IRA must also cover eligible employees, but its administration is simpler. A SIMPLE IRA has its own lower limits but predictable employer contributions. Our overview of self-employed retirement plans lays out the choices side by side.

Administration: what a Keogh actually requires

Because it is a qualified plan, a Keogh needs more paperwork than an IRA-based plan:

• A written plan document, usually a pre-approved prototype or volume submitter document from a provider, adopted by the business.
• A trust or custodial account to hold the assets.
• Annual reporting. A one-participant plan (covering only the owner, or the owner and spouse) generally files Form 5500-EZ once plan assets exceed an IRS threshold, and in its final year. Plans covering employees usually file Form 5500 or 5500-SF.
• Deadlines. Under current rules, a new qualified plan can generally be adopted after year-end, up to the business's tax-filing deadline including extensions, and still apply to the prior year. Contributions are generally due by the same deadline. A defined benefit plan has additional minimum funding deadlines. Check the specific dates each year.
• Testing and amendments. Plan documents need updating when the law changes, and plans covering employees need annual nondiscrimination testing.

None of that is unusual for a qualified plan, but it is more than a SEP IRA, which is set up with a short form and has no annual Form 5500 filing.

Keogh vs SEP IRA vs solo 401(k)

Most self-employed people who would once have opened a Keogh now choose between a SEP IRA and a solo 401(k). Both are easier to run, and the solo 401(k) is technically a qualified plan too, so in the broad sense it is a modern Keogh.

Feature	Profit-sharing Keogh	SEP IRA	Solo 401(k)
Employer contribution	Yes, flexible	Yes, flexible	Yes, flexible
Employee salary deferrals	No (unless a 401(k) feature is added)	No	Yes
Roth option	Not usually	Limited, depending on provider	Often available
Covers employees	Yes, under qualified plan rules	Yes, all eligible employees	Only owner and spouse
Annual Form 5500-EZ	Above asset threshold	No	Above asset threshold
Loans allowed	Possible if plan permits	No	Possible if plan permits

The solo 401(k) usually wins for a one-person business because the owner can make both an employee deferral and an employer profit-sharing contribution, which can reach the overall limit at a lower income than profit-sharing alone. The defined benefit Keogh still has a role where the goal is to contribute more than any defined contribution plan allows.

If you already have an old Keogh

Many people inherit or rediscover an old Keogh account, often opened decades ago. A few practical points:

• It remains a qualified plan. Distributions follow qualified plan rules, including required minimum distributions and the 10% additional tax on early distributions unless an exception applies.
• If the business has closed, the plan should be formally terminated, assets distributed or rolled over, and a final Form 5500-EZ filed where required.
• Assets can generally be rolled into an IRA or another qualified plan by direct rollover, which avoids mandatory withholding.
• If the plan was never maintained properly, a tax professional can review whether the IRS correction programs apply.

Frequently asked questions

Do Keogh plans still exist?

Yes, as a name for qualified plans sponsored by self-employed people or unincorporated businesses. The IRS still references the term, but most providers now describe these plans by type: profit-sharing, money purchase, defined benefit or solo 401(k).

What is the difference between a Keogh and a SEP IRA?

A Keogh is a qualified plan with a plan document, a trust and possible Form 5500 filings. A SEP IRA is an IRA-based arrangement with simpler setup and no annual Form 5500. Both allow flexible employer contributions, but a Keogh can be structured as a defined benefit plan and can allow loans.

How much can I contribute to a Keogh plan?

It depends on the plan type and your net earnings from self-employment. Defined contribution versions are capped by the annual IRS limits on compensation and total annual additions, which change every year. Defined benefit versions are set by an actuary. Use IRS Publication 560 or a professional for exact figures.

Can I roll a Keogh into an IRA?

Generally yes. When you leave the plan or terminate it, a direct rollover to a traditional IRA, or to a Roth IRA as a taxable conversion, is usually available.

This article is general education, not personal financial, tax or legal advice. IRS limits and deadlines change each year; confirm them with the IRS or a qualified professional before acting.