Eligible Keogh Participants

• A Keogh is a special type of retirement plan that is available only to self-employed individuals. To obtain the tax benefits of this type of account, the IRS requires that you have income from self-employment, such as from a partnership or sole proprietorship. However, if you have employees in your business, you must include each employee in the plan who is at least 21 years of age and has provided at least one year of service to your business. But if your plan allows for immediate vesting of benefits, you can require up to two years of service before the IRS will require the employee to be part of the plan.
  
  

Contributions to Keoghs

• Regardless of whether you set up a defined-benefit or defined-contribution plan, the IRS only allows the self-employed person to make contributions to the retirement account. If the plan includes your employees, they cannot make contributions to the plan. As long as all requirements are met, the IRS allows you to claim a deduction for the contributions you make, though varying limitations apply each year that are taxpayer-specific. In addition to the tax deduction, the funds within the account can earn income and appreciate in value tax-free. Therefore, no income tax is due until a plan participant begins taking retirement payments.
  
  

Participants in 403B Plans

• A 403B plan, also known as a tax-sheltered annuity, applies to an entirely different group of taxpayers who are ineligible to start a Keogh plan. In order to purchase a tax-sheltered annuity, you must be an employee of a public school, a tax-exempt religious, charitable, scientific or educational organization or be a civilian staff or faculty member of the Uniformed Services University of the Health Sciences. If you qualify, you can purchase the investment using pre-tax funds from your salary.
  
  

Contributions to 403B Plans

• The IRS is more flexible with respect to who can make contributions to a 403B plan. As the employee, the IRS imposes annual limitations on the amount of pre-tax money you can contribute to the plan; however, there are opportunities to make larger contributions using some of your post-tax dollars. In addition, your employer may elect to contribute money to your plan. When you reach the retirement age of 59 ½ you can begin receiving payments from your annuity. However, since the money you contribute to the plan is not subject to tax, the payment you receive must be included in your taxable income and reported on a return.