Generally, a Keogh Plan is a defined-benefit or a defined-contribution retirement plan set up by a self-employed person or partnership that must meet the same eligibility and coverage requirements, contribution limits, vesting requirements, rules for integration with social security, and other plan requirements, as for any qualified retirement plan covering corporate employees.

It is not necessary to have any employees to establish a Keogh, but if there are employees, they must be allowed to participate in the plan. Also, you do not have to be self-employed on a full-time basis to become eligible to open a Keogh plan. An individual who has another job during the day, but decides to supplement his or her income by turning his or her weekend hobby into a business, is eligible to open a Keogh plan based on the net earnings derived from the part-time self-employment.

• Setting up a Keogh plan: to qualify, the Keogh plan must be in writing and must be communicated to the employees. The plan's provisions must be stated in the plan. Most Keogh plans follow a standard form (a master or prototype plan) approved by the Internal Revenue Service. If you prefer, you can set up an individually-designed plan to meet specific needs, but you will usually need the help of a professional in doing so. You can set up a trust or custodial account to invest the funds or buy a contract from an insurance company.
• Contributions to a Keogh plan: there are limits on how much can be contributed to a Keogh plan each year. The amount depends on whether the plan is a defined-benefit plan or a defined-contribution plan and whether the contribution is for the benefit of an employee or a self-employed individual. Plans can be set up to allow participants to make nondeductible contributions into the plan in addition to the employer's contributions. Even though these employee contributions are not tax deductible, the earnings on them are tax-free until distribution. If you make contributions that are higher than the limits, you are considered to have made a nondeductible contribution which may also be subject to an 10 percent excise tax penalty.
• Taxation and tax penalties: distributions from Keogh Plans are taxed as ordinary income or in the same manner as distributions from any other qualified plan. There are certain transactions that are prohibited if made between the plan and a "disqualified person." A disqualified person is the employer, a plan fiduciary, a partner owning more than 10 percent of the partnership, highly compensated employees or family members related to any of these. An excise tax penalty of 100 percent is charged on prohibited transactions. It is the disqualified person taking part in the transaction who must pay the tax, not the company or the Keogh plan. One type of prohibited transaction is any loan from the plan to the self-employed individual (although this is no longer prohibited starting in 2002).
• Required communications — The Keogh plan administrator or employer must prepare and file certain annual returns and reports with the Internal Revenue Service relating to the Keogh Plan.

For more information, see our discussion of Keogh plans in the context of employee benefits.