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By David Luhman on Sun, 05/10/2009 - 00:10


A Keogh plan is used by sole proprietors who show their income and expenses on Schedule C of their 1040 tax return. Although Keoghs also can be set up by partnerships and Subchapter S corporations, I'll focus on sole proprietors here.

One of the key benefits to having a Keogh plan is the ability to save lots of money on a tax-deferred basis. If you're self-employed and net $50,000 after expenses, you can only save $2,000 in a tax-deferred Individual Retirement Account.

However if you establish a Keogh plan, you can save more like $10,000 depending on how you set up your Keogh. There are various types of Keoghs which have tradeoffs between the maximum amount you can save and the flexibility of the program. More savings potential means less flexibility.

Check on your Keogh plan's health

And what should you do if you work for a small business that provides you with retirement benefits through a Keogh plan? To ensure that the plan remains a qualified plan your employer must make certain disclosures to you regarding any retirement benefits you may be eligible for.

You can check on the assets in the plan by looking at the summary annual report, which must be given to you each year. This form outlines the plan's assets and where the money is invested. If you want more details, ask to see the plan's IRS Form 5500.

You might want to ensure that the plan administrator isn't using the plan as a private piggy bank.

The IRS has strict rules designed to prevent plan administrators from using plan assets for their personal benefit. A classic example is having the plan loan money to the business when the business faces a cash crunch.

IRS and Department of Labor audits help prevent these things from happening in large pension plans, and all plans with more than 100 employees must be audited by third parties. But it's impossible for the government to check on the hundreds of thousands of small plans out there. To a large extent, you have to do the checking yourself.

You don't have to come across as an investigative reporter, but maybe you should ask your boss about the pension plan. Just by letting your boss know that you're keeping an eye on the plan you'll discourage her from thinking about misusing the funds.

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