This is the Selling Season for IRAs, a time for thinking about how you're going to save for retirement. It's also a good time, then, to think about another popular tax-saving retirement arrangement, the Keogh plan. Although it's too late to open a Keogh for saving on your 1984 tax bill (that had to be done before New Year's Day), you still have until April 15 to make a 1984 deposit in an existing Keogh. In fact, if you get an extension on your filing deadline, you can use the new date as the deadline for making your 1984 Keogh contribution; that privilege was taken away from IRAs by Congress last year.
Keoghs were started by Congress in 1962, to give self-employed people some of the same retirement-saving tax advantages enjoyed by those who have company pensions. They were named after Rep. Eugene J. Keogh of (D) New York, whose original bill started the ball rolling.
Lately, more people are discovering they don't have to be self-employed on a full-time basis to qualify for a Keogh. Any kind of self-employment income will do. An accountant helping people with their taxes in the evenings and on weekends can have one. So can a carpenter who builds a back porch for his next-door neighbor, as can someone who represents a soap company and sells its products during spare time.
People are also discovering there are more liberal rules for Keoghs that let them save more money than an IRA (individual retirement account) and let them save longer. Those rules also let them open Keoghs in most of the same places that IRA holders can, including banks, brokerages, mutual funds, limited partnerships, and credit unions.
While people are learning about the difference between self-employed and self-employment income, most Keoghs are opened by people in the former category.
``The majority of Keogh-plan participants are self-employed entrepreneurial types who can tolerate a little higher level of risk,'' says Bruce Behling, vice-president at Strong/Corneliuson Capital Management, a Milwaukee mutual fund.
There are, to be sure, many similarities between IRAs and Keoghs. Contributions to both accounts, up to a certain point, are exempt from income taxes. And any money the accounts earn in the form of interest, dividends, or capital gains is free of federal taxes. This means all the principal and interest can grow -- and compound -- without being eaten away by current taxes.
Taxes are taken out of Keoghs, as well as IRAs, when withdrawals begin, which should not be before age 591/2. If you take money out before then, the withdrawals will be taxed as ordinary income and a 10 percent penalty will be added, with the exception of the death or permanent disability of the account holder.
Another characteristic of IRAs and Keoghs is that you can have both of them. Self-employment income qualifies for both arrangements, but if you do want to put money in an IRA, too, any contributions to the Keogh must be subtracted from the total figure for self-employment income.
Let's say you earned $30,000 in self-employment income last year. You could put $7,500 in the Keogh and still have $22,500 of qualified self-employment income. Since that is more than $2,000, you're still eligible for the maximum $2,000 IRA deposit.
The most important difference between an IRA and a Keogh is a good one for savers. While IRA contributions are limited to $2,000 a year per person, the limits on Keoghs are higher and have been raised periodically. Currently you can put up to $30,000 or 25 percent of self-employment income, whichever is less, in the Keogh.
There is another helpful difference, particularly for retirees who took their gold watch and pension, then started a new, self-employment career. With an IRA, you can't make any new contributions after age 701/2. This limit does not exist with a Keogh, so if you're working after age 591/2 but taking some withdrawals from your Keogh, you can still make tax-free deposits.
Finally, Keoghs are eligible for 10-year forward averaging, that nifty tax-saving technique that lets you take a lump-sum withdrawal at retirement and spread the taxable effects of that withdrawal over a 10-year period. You can't do this with an IRA. This advantage lets you do some more creative things with a Keogh payout, like take a lump-sum distribution as soon as you can, invest the money elsewhere, and spread the taxes due over 10 years. Meanwhile, you can keep making Keogh contributions as long as you're still working.
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