Guide to Setting up a Keogh Plan

Determine your retirement needs

Before setting up any retirement plan, take a look at your financial situation. Key information includes the number of years until you expect to retire, your income and other retirement plans and investments you might have.

I recommend: Get help figuring out your retirement needs with retirement and savings planning calculators at FinancialPlanningToolkit.com.

Get to know the Keogh

If your business is a sole proprietorship or a partnership, you can participate in a Keogh plan. In most cases, you'll want to set up a qualified plan, which means your plan must comply with IRS rules for pension plans.

I recommend: Discover who can have a Keogh plan and find a comparison of small business retirement plan options, including Keogh plans, at InvestSafe.com.

Choose a defined contribution or defined benefit plan

Your Keogh plan needs to use one of two methods: defined contributions or defined benefits. A defined benefit plan, which is generally more complex to set up, provides for a predetermined retirement benefit amount. The retirement benefit in a defined contribution plan depends on how much is contributed and how well the investment performs.

I recommend: Review a list of benefits and drawbacks for each type of plan and find your contribution limits using a Keogh contribution calculator at TIAA-CREF.org.

Choose a money purchase or profit-sharing plan

If you choose a defined contribution plan, your Keogh can be either a money purchase plan or a profit-sharing plan, or a combination of both. With a money purchase plan, you must make the same contribution each year regardless of your profits or losses. The contribution to a profit-sharing plan can change each year.

I recommend: Discover the differences in money purchase and profit-sharing plans at the IRS Web site.

Create the Keogh plan document

Once you're ready to establish your Keogh plan, you'll need to draft a document that meets the IRS requirements. Be forewarned: the paperwork requirements are extensive, but you can adopt a master or prototype plan that's been pre-approved by the IRS. Financial institutions that manage Keogh plans can provide you with an IRS-approved plan. If you have employees, you must share the plan with them and give them the opportunity to participate.

I recommend: View a prototype Keogh plan and adoption agreement that can be used to open a Keogh plan at TIAA-CREF.org or download a Keogh plan prototype from Bear, Stearns.

File with the IRS

Once you've created your Keogh plan, you'll have to file statements about it with the IRS. The filing requirements vary depending on how you set up your Keogh and whether or not you have employees. Check with your accountant to make sure you file correctly.

I recommend: See the reporting requirements section of the IRS publication, Retirement Plans for Small Business for more information on forms you may have to file. Download IRS Form 5500 Annual Return/Report and other forms for your Keogh from Financial Planning Toolkit.