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Keogh plans were created to provide a tax-sheltered retirement option for self-employed taxpayers. They can provide some very attractive tax benefits.

Unlike individual retirement accounts, which limit tax-deductible contributions to $3,000 per year, Keoghs allow you to save as much as $40,000 of your net self-employment income, depending on the type of Keogh plan you adopt. And you are allowed to have a Keogh plan in addition to another retirement plan such as an IRA.

The money in a Keogh plan grows tax deferred until you withdraw it. When you withdraw these funds, you can take advantage of some of the tax-saving techniques ý such as 10-year forward averaging that aren't available to IRA depositors.

You can open a Keogh account through banks, brokerage houses, insurance companies, mutual fund companies, and credit unions. Although the federal government sets no minimum opening balances, most institutions set their own, usually between $250 and $1,000.

Fees and commissions vary, so it makes sense to shop around.

Deposit Deadline
The deadline on a Keogh plan is sooner than it is for an IRA. You must open a Keogh by December 31 of the year for which you wish to claim a deduction.

You don't have to come up with your entire contribution by then, though. Much like an IRA, you donýt have to deposit your contribution until the day you file your tax return. That gives most taxpayers until April 15 to deposit their annual retirement savings into a Keogh account.

Necessary Paperwork
Unfortunately, the paperwork that is required to open a Keogh account is cumbersome. You'll be required to fill out forms that ask very specific estions about your business, your Keogh plan's vesting schedule, and the appointment of an administrator of the plan. You may want to use the services of an accountant in filling out these initial forms.

Unless certain exceptions are met, Keogh owners must also file disclosure Form 5500 or 5500-EZ annually.

Some banks and brokerage houses offer their customers written advice on filling out these forms.

Advantages of Simplified Employee Pension Plans

Simplified employee pension (SEP) plans enable small businesses to provide retirement benefits with lower costs and less reporting requirements than other qualified retirement plans.
SEPs offer some attractive benefits for employers and employees alike. SEPs Benefits

A simplified employee pension plan is basically a group of individual retirement accounts maintained for employees.

Under a typical SEP plan, the employer establishes IRAs for all participating employees. The employer then contributes to the IRAs, subject to the contribution limits for SEPs - not IRAs. Employer contributions are limited to the lesser of 25% of the employee's compensation or $40,000 per year. The company's contributions are not counted as current income for the employee.
SEP plans provide an effective retirement planning option for employees. They also provide the employer with an effective tax shelter.

Salary-Reduction Option
Employees can also fund a SEP through a pre-tax salary reduction. Under a salary-reduction SEP, or SARSEP, employees can elect to defer up to $12,000 of their salary to the plan (in 2003). Employee funding further reduces costs to the employer.

This salary-reduction feature enables a SEP to work much like a 401(k) plan. Note that no new SARSEP plans may be established after 1996, but contributions can continue to existing plans.

Advantages
SEPs are designed to provide a number of advantages.
They have a significantly lower setup cost to the employer than regular pension or profit-sharing plans. They also offer simpler reporting and record-keeping requirements.

For employees, SEPs offer substantially higher contribution limits than regular IRAs. This enables employees to accumulate more for retirement.

The retirement benefits in a SEP are fully vested as soon as they are contributed. This makes a SEP completely portable. Departing employees can roll their SEP balances into an IRA or have them transferred to a retirement plan sponsored by their new employer.

Simplified employee pensions can provide significant retirement benefits to employees while minimizing setup and administrative costs for employers.

The material presented on our web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice, you may wish to consult a competent attorney, tax advisor, or accountant.