Who were Keogh plans designed to provide?
Keogh plans, also known as individual retirement accounts (IRAs), were designed to provide a tax-advantaged way for individuals to save for retirement. These plans were established in 1974, named after Senator William J. Keogh, who introduced the legislation that would allow employees to contribute a portion of their earnings to a tax-deferred retirement account. The primary goal of Keogh plans was to encourage personal savings and provide a means for individuals to accumulate funds for their golden years.
The intended beneficiaries of Keogh plans were primarily self-employed individuals, small business owners, and employees of certain tax-exempt organizations. These plans were created to offer flexibility and tax benefits that were not readily available through traditional employer-sponsored retirement plans. By allowing individuals to contribute a portion of their income to a Keogh plan, the government aimed to foster a culture of personal responsibility and financial security in retirement.
Keogh plans come in two main types: defined benefit and defined contribution. The defined benefit plan is designed to provide a predetermined pension amount upon retirement, based on factors such as the employee’s salary and years of service. In contrast, the defined contribution plan allows the employee to contribute a fixed or variable amount, and the employer may also make contributions. The funds in both types of plans grow tax-deferred until withdrawal, at which point they are taxed as ordinary income.
The targeted groups for Keogh plans include:
1. Self-employed individuals: Keogh plans are particularly beneficial for self-employed individuals, as they offer a way to save for retirement while enjoying tax advantages. These plans can be tailored to meet the specific needs of the self-employed, providing flexibility in contribution limits and investment options.
2. Small business owners: Keogh plans are also suitable for small business owners who want to provide their employees with a retirement savings option. By offering a Keogh plan, employers can attract and retain talent while promoting a culture of financial wellness among their workforce.
3. Employees of certain tax-exempt organizations: Keogh plans can be an attractive option for employees of tax-exempt organizations, such as non-profit organizations and government entities. These plans offer the same tax advantages as traditional IRAs, allowing employees to save for retirement while reducing their taxable income.
In summary, Keogh plans were designed to provide a tax-advantaged retirement savings option for self-employed individuals, small business owners, and employees of certain tax-exempt organizations. By encouraging personal savings and offering flexibility in contribution limits and investment options, Keogh plans have become a valuable tool for individuals seeking financial security in their retirement years.
