When it comes to retirement savings for self-employed individuals and small business owners, choosing the right plan can significantly impact long-term financial security. Two common options are the Solo 401(k) plan and the Keogh plan. Both plans offer tax advantages and high contribution limits, but they have distinct differences that make them more suitable for specific financial and business situations.
This article provides an in-depth comparison of the Solo 401(k) and the Keogh plan, covering their key features, benefits, drawbacks, and suitability for different types of self-employed professionals.
What Is a Solo 401(k)?
A Solo 401(k), also known as an Individual 401(k) or One-Participant 401(k), is a retirement savings plan designed specifically for self-employed individuals and small business owners with no employees (except for a spouse or other business owner(s)). It functions similarly to a traditional 401(k) but is tailored for sole proprietors or single-member LLCs.
Key Features of a Solo 401(k):
- Eligibility: Available to those with self-employment activity with no other ineligible employees.
- Contribution Limits: Allows contributions as both an employer and an employee.
- Employee contribution: Up to $23,000 ($30,500 if age 50+) in 2024 and $23,500/$31,000 in 2025.
- Employer contribution: Up to 25% of compensation (up to $69,000 total, or $76,500 if age 50+) in ’24 and $1,000 more in 2025.
- Tax Advantages:
- Contributions can be pretax (reducing taxable income) or Roth (tax-free withdrawals in retirement).
- Tax-deferred growth on investments.
- Investment Flexibility: Allows investments in stocks, bonds, mutual funds, ETFs, and even alternative assets like real estate and cryptocurrencies.
- Administrative Requirements:
- Minimal paperwork.
- No annual filing unless assets exceed $250,000 (then IRS Form 5500 is required).
What Is a Keogh Plan?
A Keogh plan, also known as a HR-10 plan, is a tax-deferred retirement plan designed for self-employed individuals and small businesses, including partnerships. It was once a popular option but has declined in use due to the rise of more flexible plans like Solo 401(k)s and SEP IRAs.
Key Features of a Keogh Plan:
- Eligibility: Available to self-employed individuals and unincorporated businesses, including partnerships. Unlike the Solo 401(k), it can cover employees.
- Types of Keogh Plans:
- Defined Contribution Plan: Similar to a profit-sharing or money-purchase plan.
- Defined Benefit Plan: Functions like a pension with fixed annual contributions.
- Contribution Limits:
- Defined Contribution Keogh: Up to 25% of compensation (up to $70,000 in 2025).
- Defined Benefit Keogh: Contributions are based on actuarial calculations and can be much higher.
- Tax Advantages:
- Contributions are tax-deductible.
- Tax-deferred growth until withdrawal.
- Investment Flexibility: Similar to the Solo 401(k), offering a range of investment options.
- Administrative Requirements:
- Requires a formal plan document.
- Annual IRS reporting (Form 5500 required).
- Higher administrative costs than a Solo 401(k).
Solo 401(k) vs. Keogh Plan: A Detailed Comparison
| Feature | Solo 401(k) | Keogh Plan |
|---|---|---|
| Eligibility | Self-employed individuals or business owners with no employees (except a spouse) | Self-employed individuals and partnerships (can include employees) |
| Contribution Limits | Up to $70,000 ($77,500 if age 50+) | Up to $70,000 for defined contribution, higher for defined benefit |
| Employer Contributions | Up to 25% of compensation | 25% of compensation (defined contribution) or actuarial calculation (defined benefit) |
| Employee Contributions | $23,500 ($31,000 if 50+) | Not applicable |
| Tax Benefits | Pretax or Roth contributions, tax-deferred growth | Tax-deductible contributions, tax-deferred growth |
| Administrative Requirements | Minimal paperwork, Form 5500 required if over $250,000 | Requires a formal plan document, annual IRS filings |
| Investment Options | Broad range, including stocks, bonds, real estate, and other alternative assets | Broad range, but some restrictions based on plan type |
| Best For | Solo entrepreneurs, freelancers, small business owners without employees | Self-employed professionals and businesses with employees, those seeking pension-like benefits |
Pros and Cons of Each Plan
Solo 401(k) Pros:
✔ High contribution limits with both employee and employer contributions.
✔ More investment flexibility, including real estate and alternative assets.
✔ Roth contribution option for tax-free withdrawals in retirement.
✔ Lower administrative burden than Keogh plans.
Solo 401(k) Cons:
✖ Only available for businesses with no employees (except a spouse or business partner).
✖ Must file IRS Form 5500 once assets exceed $250,000.
Keogh Plan Pros:
✔ Higher potential contributions with a defined benefit structure.
✔ Suitable for businesses with employees.
✔ Allows for a structured pension-like plan with predictable retirement benefits.
Keogh Plan Cons:
✖ Higher administrative complexity and costs.
✖ Requires annual IRS filings and actuarial calculations (for defined benefit plans).
✖ Less flexibility than Solo 401(k) for self-employed individuals without employees.
Which Plan Should You Choose?
Choose a Solo 401(k) if:
- You are a sole proprietor, freelancer, or small business owner with no employees.
- You want a higher contribution limit with flexibility in employee and employer contributions.
- You want Roth contribution options for tax-free withdrawals in retirement.
- You prefer minimal paperwork and administrative requirements.
Choose a Keogh Plan if:
- You have a small business with employees and want a structured retirement plan for them.
- You want a defined benefit plan with higher contributions than a Solo 401(k).
- You are comfortable with additional administrative complexity and costs.
Final Thoughts
For most self-employed individuals and solo entrepreneurs, a Solo 401(k) is the better option due to its high contribution limits, investment flexibility, and lower administrative burden. However, for those with employees or those seeking a structured pension plan, the Keogh plan may still be a viable option.
Before choosing a plan, it’s advisable to consult with a financial advisor or tax professional to ensure the best fit for your financial goals and business structure.
