Explain : Types of Keogh Plans

Qualified Defined-Contribution Plans
Keogh plans can be set up as qualified defined-contribution plans, in which the contributions are made on a regular basis up to a limit. Profit-sharing plans are one of the two types of Keogh plans that allow a business to contribute up to 100% of compensation, or $58,000 as of 2021, according to the IRS.1 A business does not have to generate profits to set aside money for this type of plan.

Money purchase plans are less flexible compared to profit-sharing plans and require a business to contribute a fixed percentage of its income every year that is specified in plan documents. If a business alters its fixed percentage, it may face penalties. The contribution limit for 2021 for money purchase plans is set at 25% of annual compensation or $58,000 ($57,000 for 2020), whichever is lower.1

Qualified Defined-Benefit Plans
Qualified defined-benefit plans state the annual benefits to be received at retirement, and these benefits are typically based on salary and years of employment. Contributions towards defined-benefit Keogh plans are based on stated benefits and other factors, such as age and expected returns on plan assets. For 2021, the maximum annual benefit was set at $230,000 or 100% of the employee’s compensation, whichever is lower….(read more)

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