It pays to pay attention to letters from your banks and brokerages. If you don’t you could end up owing money to the government.
The Keogh Plan is a popular alternative to a traditional pension for individuals who are self-employed. It’s a tax-deferred retirement plan in which contributions are tax-deductible and mandatory distributions begin at age 70 years and 6 months. It was a popular option in the 1980s and 1990s, coinciding with a growth in 401(k) plans, although legislation established Keogh Plans in 1963.
In 2001, Congress enacted a law that changed laws pertaining to Keogh Plans. This change necessitated updates to account paperwork to be handled by participants, but many account holders were either uninformed or ignored notifications from their banks and brokerages.
If the Internal Revenue Service audits a retirement plan and discovers that its language is noncompliant under current law, any contributions made to the plan are not tax-deductible. All tax returns for the years affected must be redone, and earnings for the period of the audit, generally three years, are treated as taxable income. In addition, interest and often penalties, as well as taxes, are assessed.
The bottom line is that all contributions made to the Keogh would be considered non-deductible, and anyone found to be out of compliance would owe taxes and penalities.
Professionals interviewed in a New York Times article recommend rolling Keogh Plan funds over into a SEP IRA. SEP IRAs, thanks to the same law that complicated the Keogh, now offer benefits above and beyond the older type. That won’t get you out of trouble if your Keogh was non-compliant. There is still a cumbersome process to clear if you haven’t been following the new rules.
It means assembling the original plan documents and all the amendments that the bank or brokerage offered for its prototype documents; filling out forms in a 70-page document, Rev.Proc.2006-27; and paying a $750 fee to the I.R.S. for plans covering 20 people or fewer. Most people will need a pension consultant to do the paperwork, he said, and that could cost several thousand dollars.
This is another reason amongst many arguing for the simplification of tax code.
For Keogh Plans, a Technicality Could Crack a Nest Egg [New York Times]
Subscribe
6:33 pm (reply)
I have been told that my grandchildren are not allowed to stretch my IRA over their lifetime if I have already started receiving distributions being over 70 1/2. Also, if they are able to do this, since my wife in the beneficiary and they are contingent beneficiary, if I die before her, are they then able to stretch the benefits at her death.
4:10 pm (reply)
I was a self-employed cosultant from 1985 thru 1997 (Tax year). I have established a keogh money purchse plan with a large mutual fund company, I will call it MFC-1. I had funded my plan from Tax year 1985 thru 1991 with MFC-1. In calender year 1993, I established another keogh plan with MFC-2 and have funded that plan from Tax year 1992 thru 1997. I became permanently disabled in calender year 1997 and have not funded for the remaining years.
I had less than 100,000 in my MFC-2 in 2006 and at the advice of MFC-2 converted MFC-2 keogh to SEP.
I was filing 5500-EZ for the very first time to report my MFC-2 trans. While reading the instrucions for this form it indicated that I should have filed this form every year since my combined portfolio went over 100,000. While speaking with IRS I was told I have to pay 25 dollars a day fine from the date my portfolio went over 100,000. I have taken an extension to file 5500-EZ.
When I stopped funding my MFC-1 in the calender year 1993, it had less than 100000 but it has grown significantly beyond that amount over the years.
I have adopted MFC-1 and MFC-2 master plans. Howver I was never aware of this filing requirements… can someone please advice… Please send me info to my email address.
Thanks a lot
6:50 pm (reply)
The IRS is trying to make me pay a HUGE penalty for two of my retirement plans as I forgot to file the forms. My wife of 33 years had a brain tumor and passed away two years after discovery of the tumor.
Were you able to have the IRS cancel the penalty?