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You need to consider these factors when selecting the right type of Keogh:

• How much money you need to accumulate
• Your age
• Your cash flow—i.e., whether you can put money into the plan every year (for employees, too)
• The administrative cost of the different plans

A defined benefit plan is attractive to older self-employed individuals who are just starting a plan because it allows greater contributions for older plan participants. Keep in mind, you will need an actuary to calculate the amount necessary to contribute to the plan. The cost of continuing professional assistance must be factored into the decision. Also, you may have to make quarterly installments of required contributions if certain participant notification requirements are not met.

Generally, if you are young, a defined contribution plan allows you to make a greater contribution to your Keogh plan than does a defined benefit plan. Of the defined contribution plans, a money purchase pension plan requires you to contribute (contributions must be made for you and your employees) to the plan each and every year, regardless of how good or bad your business is doing. So, you need to have sufficient cash flow to support the contributions each year.

On the other hand, a profit-sharing plan is more flexible. Contributions can be any amount up to 25% of the total eligible payroll of plan participants. Plan contributions can be omitted entirely in a bad year. But the IRS does require that contributions be "substantial and recurring" so that the plan is not terminated.

Establishing a Keogh Plan

If you are self-employed, you can establish a Keogh plan for yourself. If you have employees, you must make contributions to the plan for them if they meet the minimum participation requirements (or the requirements of your plan, if more lenient). As the employer, you are responsible for establishing and maintaining the plan.

Written Plan Requirement

A written plan instrument is required for a qualified Keogh plan. All provisions of the plan must be expressly stated in the document. Most plans follow a standard master or prototype plan already approved by the IRS. You can adopt such a plan as offered at most financial institutions, including banks, insurance companies, and mutual fund companies. An individually designed plan can also be established, but IRS approval will be required.

Minimum Participation Requirements

An employee must be allowed to participate in your plan if he or she meets these conditions:

• Has reached age 21
• Has at least one year of service (two years if the plan provides that the employee has an immediate, fully vested (non-forfeitable) right to all of his or her benefit under the plan)

Setting up a Keogh

Financial institutions have prototype plan documents that can easily be completed. A trustee must generally be designated and holds title to plan assets, and is responsible for managing them unless this responsibility has been delegated to an investment manager. Where you decide to go should be based on the type of investments you want.

Investment concepts for Keoghs are similar to those for IRAs. See the section "Investment Considerations for Your IRA". Speak with your financial professional to select the investments that are right for you.

Tax Reporting Requirements

An annual filing must be made with the IRS for Keogh plans. The annual report for a plan is generally made on a Form 5500 (Annual Return/Report of Employee Benefit Plan). Reports are generally due seven months after the end of the plan year (July 31 for calendar year plans).

SUGGESTION: If your Keogh plan covers only you, or you and your spouse if you jointly own a business, you can file Form 5500-EZ, Annual Return of One Participant (Owners and Their Spouses) Retirement Plan.