How Does a Keogh Plan Work?
Jason Stolz CLTC, CRPC
Many of our customers ask us How Does a Keogh Plan Work? A Keogh plan is a type of tax-deferred retirement plan designed for self-employed individuals, sole proprietors, and unincorporated business owners. It allows higher contribution limits than traditional or SEP IRAs, making it a valuable tool for high-income professionals looking to build retirement savings while lowering taxable income.
Understanding how a Keogh plan works—its contribution rules, structure options, and rollover strategies—can help maximize its benefits. Many business owners later transfer Keogh balances into annuities to create guaranteed lifetime income or structured withdrawals.
Maximize Your Keogh Plan for Lifetime Income
Compare annuity rollover options and see how to convert your Keogh balance into reliable retirement income.
Keogh Plan Basics
Keogh plans operate much like qualified employer-sponsored plans but are established by self-employed individuals or small partnerships. They can be either:
- Defined contribution Keogh: You contribute a percentage of net self-employment income up to the IRS limit, similar to a SEP or 401(a) plan.
- Defined benefit Keogh: You commit to funding a specific retirement benefit, based on formulas like those used in defined benefit plans.
Contributions are tax-deductible, and investment growth is tax-deferred until withdrawal, usually after age 59½.
Estimate Lifetime Income from Your Keogh Plan
Compare projections and see how annuities can provide guaranteed income for life.
Contribution Limits and Tax Rules
Keogh contribution limits depend on the plan type:
| Plan Type | Limit & Calculation |
|---|---|
| Defined Contribution | Up to 25% of net earnings (after half of self-employment tax), capped at annual IRS maximum. |
| Defined Benefit | Allows funding up to the amount needed to produce an annual benefit of $265,000 (as of 2025). |
Contributions reduce taxable income, and both employer and employee portions grow tax-deferred. Withdrawals before 59½ may incur a 10% penalty unless exceptions apply.
How to Transfer a Keogh Plan to an Annuity
When you retire or close your business, you can move your Keogh balance to an IRA or annuity without triggering taxes. The process is straightforward if done as a direct rollover.
- Request a direct rollover from the Keogh plan custodian to an IRA or annuity provider.
- Confirm that funds move directly between institutions—no checks payable to you.
- Choose the right annuity for your goals: fixed, fixed indexed, or lifetime income.
Once transferred, your funds continue tax-deferred and can be structured to produce steady income or principal protection. Explore more in How to Transfer an IRA to an Annuity.
Keogh vs. SEP IRA vs. Solo 401(k)
| Feature | Keogh Plan | SEP IRA | Solo 401(k) |
|---|---|---|---|
| Eligible Participants | Self-employed or partnerships | Self-employed and small business owners | Self-employed with no full-time employees |
| Max Contribution | Up to 25% of net income | Up to 25% of compensation | Up to 25% + employee deferral ($23,000 limit) |
| Administrative Complexity | High—requires annual Form 5500 | Low—simple setup and maintenance | Moderate—recordkeeping and filing |
Taxes and Withdrawals
Withdrawals from a Keogh plan are taxed as ordinary income. You can begin penalty-free withdrawals at age 59½, and Required Minimum Distributions (RMDs) must start by age 73. Because contributions reduce taxable income now, most retirees use Keogh plans alongside Roth IRAs or Roth-converted annuities to balance future taxes.
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Keogh Plan FAQs
Who can open a Keogh plan?
Keogh plans are available to self-employed individuals, sole proprietors, and partnerships—not corporations. You must have self-employment income to qualify.
What’s the difference between a Keogh and a SEP IRA?
Both allow deductible contributions, but Keogh plans permit higher funding flexibility and defined benefit options, making them ideal for high earners.
Can I roll a Keogh plan into an annuity?
Yes. You can complete a direct rollover to a qualified annuity to maintain tax deferral and secure lifetime income options.
When must I start taking withdrawals?
Like most qualified plans, Required Minimum Distributions (RMDs) start by age 73. Early withdrawals before 59½ may face penalties.
Are Keogh contributions tax-deductible?
Yes. Contributions reduce taxable income in the year made, offering significant deductions for high-income business owners.
