A variation on the standard Keogh retirement plan that allows self-employed persons to put more than the usual $7,500 maximum into a tax-sheltered retirement account is being offered this year for the first time in the Washington area.
Called a Defined Benefit Keogh - DBK for short - the new wrinkle lets the Keogh investor decide how big a monthly benefit is needed and then put enough money into the plan each year to gurantee that benefit.
Federal regulations set maximum retirement benefits and corresponding contributions, based on the age and income of the Keogh investor. The formula is so complicated that Internal Revenue Service regulations require a registered actuary to calculate the precise amounts involved.
"In every case we've seen they can contribute more than with a regular Keogh," said John Harn II, executive vice president of McLean Savings & Loan.
McLean Savings was the first to offer DBK; and County Federal in Maryland has one and several others are drafting their plans. The U.S. League of Savings Associations is preparing a model DBK for its members, which is expected to result in a proliferation of the plans.
DBK has two basic differences:
The maximum annual contribution is bigger - up to $12,000 the first year for a person earning $50,000 a year, who would be at the 15 percent of income, $7,500 limit for a regular Keogh, Contributions decline after the first year but generally remain greater than for conventional plans.
The plan costs more to run. Harn said the actuarial service used by McLean Savings costs $200 a year and charges are higher-than at many California S&Ls, which have had DBK for several years. The actuary fees are tax deductible, Harn noted.
The higher annual contribution permitted by DBK means a bigger tax savings each year, he added, and results in greater retirement benefits. The theoretical maximum is an annual payout of just over $32,000.
Several insurance companies have DBK plans, which like other insurance Keoghs combine insurance coverage and retirement income.