77. Which one of the following statements about Keogh plans is true?
Answer: A
They were designed originally to provide retirement plans for self-employed individuals
Keogh plans, also known as HR10 plans, were specifically established to enable self-employed individuals and small business owners to save for retirement. This design allows them to benefit from tax-deferred growth and significant contribution limits.
A) They were designed originally to provide retirement plans for self-employed individuals
This statement is correct as Keogh plans were indeed created for self-employed individuals, allowing them to establish retirement savings plans that offer tax advantages similar to those of corporate retirement plans.
B) The maximum annual deductible contribution to a Keogh plan is $15,000
This statement is incorrect. The maximum contribution limits for Keogh plans can be significantly higher than $15,000, depending on the type of plan and the individual's income. For 2021, for example, the maximum contribution could be up to $58,000 or 25% of the income, whichever is less.
C) An employee must wait to participate in a Keogh plan until the fifth year of employment
This statement is incorrect. There is no requirement for employees to wait until the fifth year of employment to participate in a Keogh plan. Participation rules can vary, but they generally allow for immediate contribution for eligible self-employed individuals.
D) Funds can be withdrawn from a Keogh plan at any time with no tax penalty
This statement is incorrect. Withdrawals from a Keogh plan are subject to tax penalties if taken before the age of 59½, similar to other retirement accounts. Early withdrawals typically incur a 10% penalty in addition to regular income taxes.
Conclusion
The statement that Keogh plans were designed for self-employed individuals is definitively correct, as it aligns with their intended purpose to provide retirement savings options for this demographic. All other options either misstate the contribution limits, participation rules, or withdrawal penalties, demonstrating a misunderstanding of how Keogh plans operate.