Definition:
Keogh funds refer to money held in a Keogh plan, a type of retirement savings plan for self-employed individuals and small business owners. These funds can sometimes be used to help with a home purchase under specific conditions.
Example:
Brian is self-employed and has been saving in a Keogh plan for years. When he decides to buy a home, he consults his financial advisor and withdraws a portion of his Keogh funds to help with the down payment, understanding the tax implications involved.
Explanation:
A Keogh plan is a tax-deferred retirement account designed for self-employed professionals or small business owners. It works similarly to a 401(k) or traditional IRA but typically allows for higher contribution limits. There are two main types: defined contribution and defined benefit plans.
Withdrawals from Keogh plans are subject to strict IRS rules. Taking money out before age 59½ usually results in a 10% early withdrawal penalty and income taxes on the amount withdrawn. However, like with other retirement accounts, exceptions may apply—such as for first-time homebuyers—if the plan allows it and certain IRS conditions are met.
Using Keogh funds in a real estate transaction typically requires:
- Proof that the funds are legally accessible
- Documentation showing the withdrawal or loan (if the plan allows borrowing)
- Lender-approval if the money is used for down payment or closing costs
Why is Keogh Funds Important in Real Estate Transactions?
Keogh funds can be an important financial resource for self-employed buyers who may not have access to employer-sponsored retirement plans. For buyers, understanding the rules of using Keogh funds can help unlock extra cash for a home purchase. For sellers and agents, knowing a buyer’s funding source can help avoid delays and ensure the transaction moves smoothly.