Small Business Retirement Plan Options: Keogh Plans Vs. SEP-IRAs

Small-business retirement options include the Keogh and SEP-IRA.

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Small businesses can utilize retirement plans to reduce their tax burden, help fund retirement, shield assets and help recruit and retain employees. The options that exist depend on the business structure and the intended goal. For self-employed individuals and small-business owners two plans are often used, the Keogh and the SEP (Simplified Employee Plan) IRA. Both the Keogh and the SEP-IRA offer compounded annual returns and an increase in value tax free until the assets are distributed.

Keogh Plan

The Keogh plan is a qualified retirement plan with use limited to self-employed individuals and small businesses operating as sole proprietorships or general partnerships. This includes single-member limited liability companies treated as disregarded entities for tax purposes. Keogh plans can be set up as defined benefit plans or defined contribution plans. Defined benefit plans -- traditional pension plans -- pay out a certain dollar amount per month in retirement. Defined contribution plans -- like 401(k)s and 403(b)s -- specify the monthly or annual contribution.

Keogh Defined-Contribution Plans

A Keogh offers two types of defined contribution plans: money purchase plans and profit sharing plans. The profit sharing plan option provides the most flexibility. The Keogh profit sharing plan allows the contribution percentage to vary from year to year. However, the Keogh money purchase plan option requires the business owner to set the contribution percentage when she establishes the plan. This percentage must be met each year; otherwise, the individual will be subject to a penalty in the year the percentage is not met.


A SEP-IRA is a retirement plan for self-employed individuals and small businesses, including corporations and limited partnerships, with employees. The SEP must be established by and for each and every eligible employee. The laws governing the SEP-IRA mandate that the contribution percentage be the same for all employees and that the company, not the employee, contributes the funds to the plan. The company does not have to make contributions every year.


Both SEP-IRAs and Keoghs can be established at brokerage firms, banks or insurance companies and can invest in stocks, bonds, mutual funds, money market funds, CDs and annuities. Neither can invest in real estate. Both the Keogh defined contribution plan and the SEP-IRA have a maximum deductible contribution limit of the lesser of 25 percent or $50,000 (as of 2012). With both, plan participants can request distributions as early as age 59½.


Keoghs have much more paperwork that requires professional administrative assistance and thus incur a higher financial toll. If the defined benefit plan is elected, the complexity increases. All contributions to a SEP are completely tax deductible, but the Keogh has limitations for the defined-contribution plan option. However, the Keogh’s defined benefit plan option allows a contribution of the lesser of $200,000 or 100 percent of the participant's average compensation over the last three years. Hence, highly compensated self-employed individuals typically prefer to use the Keogh plan, and small businesses with several employees prefer the SEP.

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About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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