Massachusetts Life Producer Practice Exam

Which plan has specific contribution limits set for self-employed individuals?

1. Traditional IRA

2. Roth IRA

3. Keogh Plan

4. Simple IRA

The correct answer is: Keogh Plan

The correct answer is that the Keogh Plan has specific contribution limits set for self-employed individuals. Keogh Plans, also known as HR10 plans, are retirement plans tailored specifically for self-employed workers and small business owners. They allow for higher contribution limits compared to other traditional retirement accounts, enabling individuals to contribute a significant portion of their earnings, which can be particularly beneficial for those with variable income levels. Under the current regulations, self-employed individuals can contribute either a percentage of their net earnings or a set dollar amount, depending on the type of Keogh plan they choose (defined contribution or defined benefit). This allows for flexibility and maximizes their retirement savings potential. In contrast, while Traditional IRAs, Roth IRAs, and Simple IRAs also have contribution limits, those amounts are generally lower and do not specifically cater to the unique financial situations of self-employed individuals in the same way that a Keogh Plan does. Traditional and Roth IRAs are more universal in their application and have standard limits irrespective of a person's employment status. Simple IRAs can be advantageous for small businesses, but they still do not offer the same level of contribution flexibility as Keogh Plans do for self-employed persons.