How does a Keogh plan work? A Keogh plan is a retirement plan built for self-employed individuals and certain small business owners who want the structure and tax advantages of a qualified plan—often with the ability to save more than a traditional IRA. Keogh plans have been around for decades and are still used today (even though many people now default to a Solo 401(k) or SEP IRA) because the Keogh framework can support both a defined contribution approach and a defined benefit approach. In plain English: a Keogh can be designed either like a “set-aside-a-percentage” plan or like a “target-a-specific-retirement-benefit” pension plan.

The most important idea is that a Keogh plan is not “one product.” It’s a category of qualified retirement plan that follows IRS and ERISA-style rules. That structure affects contributions, deadlines, reporting, investment flexibility, and distribution choices later. Many high-income self-employed professionals use a Keogh during peak earning years, then later simplify their retirement picture by rolling the Keogh into an IRA and/or converting part of the balance into an annuity for guaranteed lifetime income.

If your goal is to transform a lump sum into reliable retirement income later, it helps to understand how a Keogh works from start to finish: how contributions are calculated, what “compensation” means for self-employed income, what happens if you hire employees, how withdrawals work, and what your rollover options look like at retirement. We’ll walk through each of those pieces and show how Keogh dollars can ultimately be positioned for predictable income planning using annuities and structured payout strategies.

What a Keogh Plan Is—and Who It’s Built For

A Keogh plan is typically established by a self-employed person (or a partnership) for the purpose of providing retirement benefits. Historically, “Keogh” referred to qualified plans for self-employed individuals, which is why you’ll still hear the term used by CPAs and long-time advisors. In practice, the Keogh label often shows up when the plan is set up as a formal qualified plan rather than a simpler IRA-based solution.

The right fit is usually someone with higher income and the discipline to follow plan rules year after year. If your income is inconsistent, a plan with rigid funding requirements may create stress. If your income is consistently high and you want to maximize tax-deferred contributions, the Keogh framework can be compelling. That’s especially true when the plan is structured as a defined benefit style Keogh (which can sometimes allow extremely large contributions when designed properly), though that design comes with more administration and actuarial oversight.

Keogh plans are most commonly discussed alongside a few other self-employed options: the SEP IRA and the Solo 401(k). If you want a baseline comparison before you go deeper, it helps to understand how those alternatives work in real life. A SEP IRA can be straightforward for many owners, and you can review that structure here: How does a SEP IRA work? If you operate a business with no full-time employees (other than a spouse), a Solo 401(k) is also a common solution; you can review the mechanics here: How does a Solo 401(k) work?

The Keogh conversation usually starts when one of these is true: you want a formal plan structure, you want to target a specific retirement benefit, you want the flexibility of a defined benefit design, or you already have a Keogh and you’re deciding what to do with it as retirement approaches.

The Two Main Keogh Designs: Defined Contribution vs. Defined Benefit

Keogh plans are typically discussed in two categories. The first is a defined contribution Keogh. Think of this as a plan where contributions are determined by a formula (often a percentage of eligible compensation) and your eventual retirement outcome depends on investment performance and how consistently you fund the plan. The second is a defined benefit Keogh. Think of this as a plan where you target a specific retirement benefit, and contributions are calculated to fund that benefit—often requiring higher contributions in peak earning years and requiring actuarial calculations.

If you’ve ever asked, “Is a Keogh more like a 401(k) or more like a pension?” the answer is: it can be either, depending on how it’s drafted. If you want to understand how pension-style funding and benefit formulas work at a high level, it can help to read this guide first: How does a defined benefit plan work? That page explains the logic behind benefit targets and funding obligations—concepts that also apply when a Keogh is structured as a defined benefit arrangement.

From a planning perspective, the “best” design depends on your real-world goals. Some owners want maximum contribution flexibility and simpler administration, which tends to favor a defined contribution approach. Others want to accelerate retirement savings aggressively (especially later in their career) and are comfortable with more administration, which may point to a defined benefit structure. Either way, the plan’s rules matter because they govern what you can contribute, how you document it, and how you later access or roll out the money.

How a Keogh Plan Is Set Up and Maintained

A Keogh is a formal qualified plan. That means it has a plan document, it has eligibility rules, and it follows contribution and distribution rules that are designed to align with federal retirement plan standards. In practical terms, this structure can create two important realities. First, the plan is designed to last across years, not months—so it works best when you intend to consistently fund it. Second, it often requires more administration than IRA-based options.

Administration isn’t automatically “bad.” In some cases, it’s exactly what enables larger contributions or the kind of benefit design you want. The trade-off is that you typically must keep clean records, follow contribution timing rules, and in some situations file specific reporting forms. If your plan has employees eligible to participate, you must also handle nondiscrimination and coverage requirements. This is one of the biggest decision points for business owners: if you hire employees (or plan to), the cost of “doing it right” increases, but the Keogh framework can still work well when the plan is designed thoughtfully.

A practical way to think about this is: the Keogh plan document is the “rulebook” for your retirement savings. The IRS rules establish the guardrails, but the plan document determines how those guardrails apply to you—especially for eligibility, contribution formulas, and vesting if there are employer contributions to eligible participants.

How Contributions Work: The Core Mechanics in Plain English

The contribution story is where most Keogh confusion starts, because “compensation” and “net earnings from self-employment” can be calculated differently than W-2 wages. In a traditional employee plan, compensation might mean wages shown on a W-2. In a self-employed environment, the plan typically uses a definition tied to business earnings after certain adjustments. That’s why two people with the same gross revenue can end up with different maximum contribution outcomes depending on business structure, expenses, and how income is reported.

With a defined contribution Keogh, the plan typically allows contributions up to a percentage of eligible compensation, subject to annual limits. The plan may be drafted as a profit-sharing style contribution formula. With a defined benefit Keogh, contributions are calculated to fund a targeted retirement benefit, and that calculation usually depends on age, expected retirement date, assumed rate of return, and other actuarial inputs. The practical implication is that defined benefit Keogh contributions can become very large later in a career, but they must be supported by the funding plan and maintained properly.

Another key point: Keogh contributions are generally made with pre-tax dollars in the sense that they are intended to be tax-deductible contributions (subject to the plan’s rules and IRS requirements). Growth is tax-deferred, and withdrawals are generally taxed as ordinary income later. This is the common retirement-plan trade: you get a tax advantage today, and you pay tax later when you take distributions.

What Happens If You Have Employees

One of the most overlooked Keogh realities is that it’s not only “your” plan if your plan document makes employees eligible. Many business owners start as solo operators and later hire staff. When that happens, qualified plan rules can require contributions for eligible employees and can require coverage testing depending on the plan design. This doesn’t mean a Keogh stops being useful, but it does mean the plan must be coordinated with payroll, eligibility tracking, and consistent plan administration.

In a defined contribution design, employees might become eligible after meeting the plan’s service and age requirements, and the plan may require employer contributions under the chosen formula. In a defined benefit design, employee inclusion can materially increase funding obligations and administrative complexity. This is why business owners often evaluate the Keogh against other structures as the business evolves, and why it can be helpful to revisit the “end game” early: will you likely keep this plan to retirement, or is this a high-income-season tool you intend to later roll into a simpler account?

How Keogh Assets Are Invested

Most Keogh plans allow the assets to be invested in a range of permitted investments depending on the custodian and the plan’s structure. The investment lineup might resemble what you see in other qualified accounts: mutual funds, ETFs, bonds, and cash-like options. In some cases, the plan can hold other permitted investments depending on the provider and plan design. The key point is that the Keogh is a container. It holds investments and grows tax-deferred, but your outcome depends on the plan’s contribution design and the investment performance over time.

That’s why many high-income self-employed professionals eventually want to “de-risk” a portion of the account as they approach retirement. The question usually changes from “How aggressively should I invest?” to “How do I turn this into income I can rely on?” When that shift happens, annuities tend to enter the conversation because an annuity can function as a personal pension—especially when you want guardrails and predictable cash flow.

How Keogh Money Becomes Retirement Income

A Keogh plan is designed for accumulation, but it eventually reaches a distribution phase. That phase is where many people feel uncertain, because qualified plan distributions involve tax consequences, timing rules, and planning trade-offs. In retirement, you typically need a strategy for three problems at the same time: taxes, longevity risk (not outliving money), and sequence-of-returns risk (what happens if markets are down early in retirement).

This is also where many people consider whether to allocate part of their retirement savings to a guaranteed income solution. Annuities can play that role, and the concept is simple: you exchange a portion of a lump sum for a contractually defined outcome—often a guaranteed income stream, or principal protection with interest crediting. If you want a broad overview of annuity types before you connect the dots to Keogh rollovers, start here: Annuities.

When people ask whether it’s “smart” to use annuities for guaranteed income, a practical starting point is comparing what the market is offering right now. That’s why we often recommend reviewing: Current annuity rates. From there, you can decide whether a portion of your Keogh should be positioned for guarantees and income, while keeping the rest invested for growth and liquidity.

Estimate Lifetime Income from Your Keogh Plan

Use the calculator to model potential income scenarios, then compare options on the current annuity rates page.

Withdrawals, Taxes, and Required Minimum Distributions

Keogh distributions are generally taxed as ordinary income when withdrawn. Because the Keogh is a qualified plan, the distribution rules tend to align with other qualified accounts. That means timing matters: withdrawals taken too early can be penalized unless an exception applies, and later in life the IRS requires distributions to begin under Required Minimum Distribution rules.

From a retirement-planning standpoint, the important takeaway is that the Keogh is not only about “how much you saved.” It’s also about “how you take it out.” If you want a quick “what do I do now?” framework for the retirement transition, this page can help you think through the sequence of choices: What should I do with my Keogh after I retire?

That page focuses on real-world decisions like leaving funds where they are (when possible), rolling to an IRA, and converting part of the balance into income. It’s common to split the outcome: keep some money liquid and growth-oriented, and secure an income floor with an annuity.

How a Keogh Rollover Works (And Why “Direct” Matters)

Most tax problems with retirement transfers come from mechanics, not intent. People don’t mean to trigger a taxable event—they just follow the wrong distribution pathway. A “direct rollover” generally means the money moves from the plan to the receiving account without being paid to you personally. That reduces the chance of withholding, avoids accidental deadlines, and preserves tax deferral.

If you want the step-by-step explanation of how the direct rollover process works in practice, start here: What is a direct rollover? The same logic applies whether you are rolling into an IRA, rolling into another qualified plan, or rolling directly into an annuity carrier in a qualified contract setup.

Keogh rollovers become especially relevant at retirement because many business owners want to consolidate accounts and simplify. They may also want to reduce investment complexity and create a predictable retirement paycheck. That’s where the rollover-to-annuity pathway is often considered, because an annuity can formalize the income plan and reduce the stress of “self-managing withdrawals” year after year.

How to Transfer a Keogh Plan to an Annuity

Transferring a Keogh plan to an annuity is typically a structured rollover process. The goal is to move qualified retirement dollars into an annuity contract designed for retirement income, principal protection, or both—without triggering tax along the way. The paperwork is usually straightforward when done correctly, but the details matter: how the distribution request is written, how the receiving company is listed, and how the funds are sent.

If you want the dedicated, Keogh-specific transfer walkthrough, use this guide: How to transfer a Keogh to an annuity. That page focuses on the practical steps and how to avoid common errors during the handoff.

From a planning perspective, the reason people do this is rarely “because annuities are good” in a generic sense. The more common reason is that a Keogh owner is trying to solve a specific retirement problem: creating income that does not depend on market returns, establishing predictable cash flow for essential expenses, coordinating income timing with other benefits, or creating survivor protection for a spouse.

When It Can Make Sense to Use an Annuity for Keogh Dollars

Not every dollar needs to be guaranteed, and not every retiree wants an annuity. But many Keogh owners reach a point where a portion of their nest egg needs to behave like a paycheck, not like a portfolio. That’s especially true for self-employed professionals who do not have a traditional pension and want to create an income floor that feels similar to one.

If you want to see how retirees think about “guaranteed income first” planning, a helpful overview is this page: Best annuity for guaranteed income in retirement. It frames the decision in terms of outcomes—income reliability, protection features, and trade-offs—rather than product buzzwords.

Another practical lens is to treat annuities as a tool for retirement sequencing. If markets are down early in retirement, pulling large withdrawals from a volatile portfolio can permanently damage the plan. A stable income source can reduce that pressure, which is one reason people consider annuities for the essential-expense portion of their budget.

A Practical Planning Framework for Keogh Owners Approaching Retirement

For many self-employed professionals, the most useful retirement planning framework is surprisingly simple: separate needs into “must-pay” and “nice-to-have,” build a reliable income floor for must-pay expenses, then keep a growth sleeve for inflation and flexibility. This approach doesn’t require you to guess market returns perfectly. It requires you to match the right tool to the right purpose.

If you are still in accumulation mode and contributing aggressively, your focus is usually maximizing contributions and keeping costs reasonable. As retirement approaches, your focus usually shifts toward distribution design. That’s where annuity comparisons can become useful. Reviewing current rate environments can provide clarity on what a guaranteed income or principal-protection allocation might look like in today’s market. A practical starting point is the rate overview here: Current annuity rates.

At the same time, it is common for self-employed retirees to hold multiple plan types: a Keogh, a SEP IRA, maybe a Solo 401(k) from later years, and personal savings. The coordination question is not “which account is best?” It’s “which account should fund which goal?” The answer often depends on taxes, liquidity needs, and your timing for income. If you have multiple accounts, it can be useful to run a scenario where Keogh dollars fund a portion of predictable income while other accounts remain flexible for large one-time expenses or discretionary spending.

Common Keogh Mistakes That Can Cost Real Money

Most Keogh mistakes fall into a few predictable categories. The first is contribution confusion—using the wrong definition of eligible income or missing a deadline. The second is employee eligibility mistakes—hiring staff and failing to update plan administration appropriately. The third is rollover errors—moving funds the wrong way and triggering withholding, taxes, or avoidable penalties. The fourth is retirement timing mistakes—waiting too long to evaluate distribution choices and then defaulting into a suboptimal payout approach.

If you take nothing else from this page, it should be this: treat the Keogh like a formal retirement plan with rules, not like a generic brokerage account. When you follow the rules correctly, the Keogh can be a powerful savings tool. When you misunderstand the rules, it can create friction at the worst possible time—right when you are trying to retire and simplify.

That’s why, for rollovers, we generally recommend starting with the mechanics guide before choosing the destination. Here is that rollover mechanics overview again: What is a direct rollover? Understanding the plumbing first helps you avoid accidental taxable events later.

How Long Could Your Keogh Last in Retirement?

Some Keogh owners want to see the “runway” first before they choose income products. That’s a smart instinct. If you understand how long your current balance might last under different withdrawal rates, you can decide what portion (if any) should be secured into guaranteed income and what portion should stay flexible. If you want that analysis, you can use this page as a next step: How long will my Keogh last in retirement?

That kind of analysis helps you avoid an all-or-nothing mindset. Many retirees end up building a blended plan: part guaranteed, part flexible, part growth. The best structure is the one that makes your retirement paycheck durable in the real world—across market cycles, inflation, and unexpected expenses.

Coordinating a Keogh with Other Retirement Plans

Keogh owners often have more than one retirement vehicle over a lifetime. You might have started with a SEP IRA, later opened a Solo 401(k), and kept a Keogh because it was already in place or because it supported a specific contribution design. As retirement approaches, the coordination question becomes: “How do I simplify without creating taxes?” In many cases, the path is to roll qualified money into an IRA, and then use IRA dollars (or directly rolled qualified dollars) to implement an annuity allocation if income is the goal.

If your Keogh is being compared to other self-employed structures, it’s worth reviewing how those alternatives work in practice so you understand what you are gaining or giving up. Here are the two most common comparison points: How does a SEP IRA work? and How does a Solo 401(k) work?

And if part of your strategy involves a pension-style benefit design (or you’re trying to understand why a defined benefit Keogh might allow larger contributions), this guide can help connect the dots: How does a defined benefit plan work?