Taxes Made Simple

Suzanne (freelance writer) asks:

Mike,

I'm a professional writer. A little over a year ago left my job to have my first child. I just recently started doing some freelance work to make some extra cash while still being able to work at home. My neighbor told me that since it's self-employment income, I should put it into a Keough plan. I read a little online, but I'm very confused by all the different types. For somebody who isn't (yet?) earning the big bucks with her business, what type of Keough plan would you recommend?

Thanks,

Suzanne

Answer:

Hello Suzanne. Your neighbor's idea to contribute to a retirement plan is an excellent one. First, a very brief history lesson in hopes that it will shed some light:

Keogh plans (of which there are two types: money purchase plans, and profit sharing plans) were introduced in the 60s as the first type of retirement plans for people who don't work as employees. Since then, a few options have come along (SEP IRAs, SIMPLE IRAs, solo 401k) which have more or less replaced Keoghs due to their extra flexibility over Keogh plans. However, the name "Keogh" seems to have stuck around. Today many people use it (albeit incorrectly) to refer generically to any type of self-employed retirement plan.

Generally speaking, you don't want to set up an actual Keogh plan. SEP IRAs, SIMPLE IRAs, and Solo 401k plans tend to provide more flexibility than Keogh plans. And given that they aren't any more expensive than Keogh plans, it just doesn't make sense for anybody to be starting a Keough these days.

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