What Happens to Your Keogh Plan When You Leave? Our Advice
Your Keogh Plan does not disappear when you leave a business or stop participating, but what you do next can determine how much control, flexibility, and retirement income you have later.
If you have money in a Keogh Plan and you’re leaving the business, retiring, closing the business, or otherwise becoming eligible to move the money, you need to decide what happens next.
A Keogh Plan, sometimes called an H.R. 10 plan, is a qualified retirement plan historically used by self-employed individuals and owners of unincorporated businesses. Although the term isn’t used as much today, plenty of people still have retirement money in plans commonly referred to as Keogh Plans.
The important part is that this is qualified retirement money.
You generally don’t want to make a decision without understanding the tax consequences and what each option means for your retirement.
Depending on the plan and your circumstances, you may be able to:
- Leave the money in the existing Keogh Plan.
- Roll the Keogh Plan into an IRA.
- Roll it into an IRA annuity with a guaranteed lifetime withdrawal benefit.
- Potentially move the money into another eligible qualified retirement plan.
- Cash the account out.
For many people, we prefer moving an old Keogh Plan into an IRA because it puts the retirement money under your direct control. For people approximately age 40 and older who are primarily concerned about generating predictable retirement income, we also recommend comparing an IRA annuity with a guaranteed lifetime withdrawal benefit.
Here is how the choices work.
Option 1: Leave the Money in the Keogh Plan
Depending on the terms of the plan and what happens to the business, you may be able to leave the money where it is.
This requires the least amount of effort.
Your retirement money remains inside the qualified plan, continues receiving tax-deferred growth, and remains invested according to the options available through the plan.
We generally don’t like leaving old retirement accounts unattended simply because doing nothing is easy.
The concern is oversight.
If you’re no longer actively involved with the business or plan, you need to know:
- Who is administering the account?
- What is the money invested in?
- What fees are being charged?
- How much risk are you taking?
- Who is making sure the investments still fit your retirement goals?
- How will you eventually turn the account into retirement income?
Retirement accounts can sit untouched for years. That doesn’t necessarily mean anything bad will happen, but there is no advantage to ignoring money that may eventually need to support you for 20 or 30 years in retirement.
Pros
- No immediate rollover is required.
- Money generally remains tax-deferred.
- You don’t have to choose a new financial institution immediately.
- The existing plan may have investments or pricing you want to keep.
Cons
- Investment choices may be limited.
- You may have less direct control.
- The account can become something you rarely monitor.
- Managing multiple retirement accounts becomes cumbersome.
- The plan may not be designed around producing predictable retirement income.
- Future plan administration can become more complicated if the business closes or changes.
Who Might Need This Option
Leaving the account alone can make sense if the existing Keogh Plan has excellent investment choices, reasonable costs, and appropriate administration and you are satisfied with how the money is being managed.
It can also make sense temporarily if you’re not ready to make a rollover decision.
Who Probably Doesn’t Need It
If you want greater control, broader investment choices, easier account consolidation, or a defined retirement-income strategy, leaving the money in an old plan indefinitely may not accomplish much.
Option 2: Roll the Keogh Plan Into an IRA
For many people, this is our preferred starting point.
An eligible Keogh Plan distribution can generally be transferred to an IRA through a properly completed rollover.
When eligible pretax retirement money is moved directly from the qualified plan into a traditional IRA, you generally preserve the tax-deferred status of the money instead of creating an immediate taxable distribution.
Now you control the IRA.
You’re no longer limited to whatever investments were available through the Keogh Plan.
Depending on the financial institution and type of IRA, you may have access to:
- Stocks
- Bonds
- Mutual funds
- ETFs
- CDs
- Fixed annuities
- Fixed indexed annuities
- Other permitted retirement investments
You can manage the IRA yourself or hire someone to manage it for you.
That’s one of the biggest advantages.
Instead of leaving a retirement account behind and forgetting about it, you can consolidate it with other retirement money and monitor everything in one place.
Use a Direct Rollover When Possible
The cleanest way to move qualified retirement money is typically through a direct rollover.
The money goes from the Keogh Plan directly to the receiving IRA rather than being paid to you personally.
That matters.
When retirement money is distributed directly to you, withholding requirements and rollover deadlines can create unnecessary complications.
A direct rollover generally makes the process cleaner and helps avoid accidentally turning a retirement-account transfer into a taxable distribution.
Pros
- Greater control over the retirement money.
- Much broader potential investment selection.
- Easier to consolidate retirement accounts.
- Tax deferral can continue when properly rolled over.
- You can manage the investments yourself.
- You can hire an advisor if you want help.
- The IRA can potentially be used to purchase an annuity.
Cons
- You are responsible for choosing investments.
- Market-based investments can lose money.
- Investment and advisory fees vary.
- You may give up benefits associated with the original qualified plan.
- An IRA does not automatically provide guaranteed retirement income.
Who Might Need It
An IRA rollover can make sense if you want direct control over your retirement savings, want to consolidate old accounts, or want access to investment and insurance products not available inside the Keogh Plan.
Who Might Not Need It
If your existing Keogh Plan has unusually attractive benefits, inexpensive investments, or other features you value, compare those advantages before moving the account.
Option 3: Roll the Keogh Plan Into an IRA Annuity With Guaranteed Lifetime Income
This is where our recommendation changes for many people approaching retirement planning seriously.
If you’re approximately age 40 or older, we think it is worth comparing a traditional IRA against an IRA annuity with a guaranteed lifetime withdrawal benefit, commonly called a GLWB.
Why?
Because investing for retirement and creating retirement income are two different jobs.
An investment account is primarily designed to accumulate money.
A properly structured annuity with a lifetime-income rider can be designed to tell you in advance how much guaranteed income the contract can produce at a future retirement age.
That’s a major difference.
Turning a Keogh Plan Into a Personal Pension
Suppose you’re in your early or mid-40s and have accumulated several hundred thousand dollars inside a Keogh Plan.
You don’t necessarily have to wait until you’re 65 to start thinking about retirement income.
You could potentially complete a direct rollover into an IRA annuity and select a strategy designed around future lifetime income.
Depending on the annuity, you may be able to determine today how much guaranteed annual income the contract can provide if you begin taking withdrawals at age 55, 60, 62, 65, 67, or 70.
You’re essentially building your own personal pension.
The longer you defer the income, certain products may provide higher contractual income amounts.
That gives you something an ordinary investment portfolio cannot provide in the same contractual manner: a predetermined lifetime-income guarantee based on the insurance contract.
Why We Like Starting Earlier
People commonly wait until they’re 60 or 65 to ask: How much retirement income can my savings produce?
We think the question should be asked much earlier.
If you’re 42 and have $300,000 saved, the question isn’t only: How large can I grow this account?
You should also ask: How much guaranteed lifetime income could this $300,000 produce at age 60, 65, or 70?
Now you have something you can plan around.
This doesn’t mean everybody in their 40s should put all of their retirement money into an annuity.
It means that if guaranteed future income is one of your primary goals, you should compare the numbers instead of waiting another 20 years and hoping you’ve accumulated enough.
The Income Benefit Base Is Not Cash Value
This distinction is important.
Many annuities with guaranteed lifetime withdrawal benefits use something commonly called an income benefit base.
An insurance company might apply a roll-up, bonus, or other contractual calculation to that benefit base.
That does not necessarily mean your actual cash value earned that return.
The income base is typically an accounting value used to calculate your guaranteed future withdrawals.
For example, if an income benefit base grows according to a contractual formula, the insurance company later applies the appropriate payout percentage to that amount.
The resulting number determines your available guaranteed lifetime withdrawal.
Don’t confuse an income benefit calculation with actual investment performance.
Why This Can Require Less Retirement Capital
Traditional investment-based retirement strategies frequently estimate how much income can safely be withdrawn from a portfolio without exhausting the money too quickly.
You might hear withdrawal assumptions around 4%, although the appropriate amount varies based on age, investment performance, inflation, longevity, asset allocation, and market conditions.
An annuity approaches the problem differently.
Instead of trying to determine a sustainable investment withdrawal percentage, the insurer contractually establishes the lifetime-income withdrawal under the rider.
Depending on your age, product, deferral period, and insurer, that amount may be substantially higher than the initial income generated using a conservative portfolio withdrawal strategy.
That means the amount of capital required to generate a specific retirement income can sometimes be considerably lower.
We have seen consumers in their 40s place several hundred thousand dollars into an appropriately designed income annuity and establish future guaranteed-income amounts that could repay the amount originally contributed within only several years after withdrawals begin.
After that point, if the contract’s underlying account value eventually reaches zero while the lifetime-income rider remains in force and withdrawals have followed its rules, the insurance company continues paying the contractual lifetime benefit.
That’s one of the primary reasons to buy the income rider.
You are transferring longevity risk to an insurance company.
What Happens If the Annuity Account Reaches Zero?
This is one of the biggest differences between an income annuity and a normal investment withdrawal strategy.
With an investment account, once you’ve spent the account down to zero, you’re done.
There is no more money.
With a properly structured annuity containing a guaranteed lifetime withdrawal benefit, the underlying account value can potentially reach zero while the insurance company’s obligation to pay the covered lifetime income continues.
You must follow the rider’s rules.
Excess withdrawals can reduce or eliminate guarantees, so this isn’t an account you treat like an unrestricted checking account.
But when properly structured and managed, it creates an income stream designed to last as long as the covered person lives.
Pros
- Contractually guaranteed lifetime income.
- Future income can often be calculated years in advance.
- Can supplement Social Security.
- Can replace part of the pension income you don’t have.
- Fixed indexed annuities can protect principal from direct market losses.
- Lifetime payments can continue after account value reaches zero, subject to contract terms.
- Joint-life options may cover both spouses.
- Remaining account value can generally pass to beneficiaries.
- Reduces dependence on future stock-market performance for retirement income.
Cons
- Surrender charges can apply.
- Some income riders have annual fees.
- Liquidity can be more limited than with a brokerage IRA.
- The income benefit base is not cash value.
- Guarantees depend on the claims-paying ability of the insurance company.
- Contracts can be complicated.
- Not every annuity has competitive income guarantees.
- Excess withdrawals can damage the lifetime-income guarantee.
Who Might Need It
People who should seriously consider comparing this strategy include those who:
- Are approximately age 40 or older.
- Want predictable retirement income.
- Do not have a traditional pension.
- Are concerned about outliving their savings.
- Want to supplement Social Security.
- Want to reduce future dependence on stock-market performance.
- Want to know approximately what guaranteed income can be available at a specific retirement age.
- Prefer contractual guarantees over relying entirely on market-return projections.
Who Doesn’t Need It
You may not need an income annuity if you already have more than enough pension and Social Security income to cover your retirement expenses.
You also may not need it if your primary goal is maximum liquidity, aggressive investment growth, or leaving the entire retirement account invested in the market.
An annuity shouldn’t be purchased merely because the money is available. It should solve an income or risk-management problem.
Option 4: Move the Money Into Another Eligible Retirement Plan
Depending on your circumstances and the rules of the receiving plan, you may also be able to roll eligible Keogh Plan assets into another qualified retirement arrangement.
This can make sense if you have another business or employer-sponsored retirement plan and the new plan accepts incoming rollovers.
The advantage is consolidation.
Instead of having one retirement account here, another there, and another somewhere else, you potentially keep your qualified retirement assets together.
Pros
- Can simplify retirement-account management.
- Maintains tax-deferred treatment when properly completed.
- May provide institutional investment choices.
- Avoids immediately creating a taxable distribution.
Cons
- The receiving plan may not accept rollovers.
- Investment choices may be limited.
- Plan fees can vary.
- You remain subject to the new plan’s rules.
- You may have fewer retirement-income options than with an IRA.
Who Might Need It
This may work for someone who already participates in another qualified retirement plan and wants to consolidate everything.
Who Might Not Need It
If you want complete control over the investment selection or want to purchase an IRA annuity, a traditional IRA rollover may provide more flexibility.
Option 5: Cash Out the Keogh Plan
Yes, you can potentially take the money.
For most people, this is the worst long-term option.
When you cash out pretax qualified retirement money, the distribution generally becomes taxable income.
That means you can owe federal income tax.
Depending on where you live, you may also owe state income tax.
If you’re under age 59½, an additional 10% federal early-distribution tax may also apply unless you qualify for an exception to avoid taxes and penalties.
That’s a lot of money potentially disappearing to taxes before you’ve even had the opportunity to use the retirement account for retirement.
Example: Cashing Out $300,000
Suppose you have $300,000 in a Keogh Plan.
You decide you’ve had enough and want the entire amount sent to you.
You shouldn’t assume you’re walking away with $300,000 to spend.
The taxable distribution can significantly increase your income for the year.
You could potentially owe federal income taxes, state income taxes where applicable, and an additional 10% federal tax if you’re under age 59½ and no exception applies.
The bigger problem is what happens afterward.
That $300,000 is no longer growing tax-deferred for retirement.
You have potentially taken decades of retirement savings and converted it into one very large taxable event.
Unless you desperately need the money and have evaluated every other alternative, we generally don’t recommend cashing out a Keogh Plan.
Pros
- You have immediate access to the money.
- No future retirement-plan restrictions apply to money you’ve withdrawn.
Cons
- Potentially substantial federal taxes.
- State taxes may apply.
- Possible additional 10% federal tax before age 59½.
- Loss of tax-deferred growth.
- Less money available for retirement.
- A large distribution can potentially push additional income into higher tax brackets.
- The money can be spent far more quickly than expected.
Who Might Need It
Someone facing a legitimate financial emergency and who has exhausted better alternatives may ultimately need retirement savings.
Even then, investigate whether a partial distribution or another strategy could solve the problem without liquidating the entire account.
Who Doesn’t Need It
If you do not need the cash immediately, creating a large taxable distribution simply because you are leaving the plan usually doesn’t make financial sense.
What We Recommend If You’re in Your 20s or 30s
At this age, time is your biggest advantage.
If you leave behind a Keogh Plan, consider consolidating it into an IRA or another suitable retirement plan rather than forgetting about it.
You can then build an investment strategy based on your risk tolerance and retirement goals.
The most important thing is keeping that retirement money working for your future instead of spending it today.
What We Recommend If You’re in Your 40s
This is when we believe you should start looking beyond simply accumulating the largest possible account balance.
Start working backward from retirement income.
Ask yourself: How much income do I want at retirement?
Then determine how much of that will come from Social Security, pensions, investments, annuities, and other sources.
If you want a predictable lifetime-income floor, compare an IRA annuity with a guaranteed lifetime withdrawal benefit against a traditional investment IRA.
This doesn’t mean you have to choose one or the other for everything.
You can use both.
Part of your retirement savings can remain invested for growth while another portion establishes guaranteed future income.
What We Recommend If You’re in Your 50s
Now retirement is close enough that protecting your income plan matters considerably more.
A major stock-market decline at 55 or 60 can hurt far more than the same decline when you’re 30.
You should be evaluating growth, principal protection, lifetime income, Social Security, taxes, healthcare, long-term care, life insurance, and legacy goals.
Your Keogh Plan shouldn’t be evaluated in isolation.
It is one piece of the retirement plan.
What We Recommend at Age 59½ and Older
Once you’re over age 59½, the ordinary 10% additional federal early-distribution tax generally becomes less of an issue.
That doesn’t make the money tax-free.
Pretax retirement distributions are generally still taxable as ordinary income.
At this stage, the bigger questions are: How much retirement income do you need? Where will it come from? How long does it need to last? How much risk can you afford to take?
If you don’t have sufficient pension income, an IRA annuity with a guaranteed lifetime withdrawal benefit may be worth comparing.
Should You Manage the IRA Yourself?
You can.
Once your Keogh Plan is rolled into a self-directed or brokerage IRA, you’re not required to hire a money manager just because the account is large.
Today, investors have access to considerably more information and low-cost investment tools than they did decades ago.
You can use diversified funds, model portfolios, research tools, educational resources, and technology to help manage an account.
However, don’t confuse having access to information with having a retirement plan.
Investment selection is only part of retirement planning.
You still need to consider taxes, withdrawal sequencing, Social Security, required minimum distributions, healthcare, longevity, long-term care, inflation, sequence-of-returns risk, and estate planning.
If you don’t want to handle those decisions yourself, professional help may make sense.
Other Insurance You Should Review
Leaving a business or changing your employment situation can affect more than your Keogh Plan.
Your insurance needs should be reviewed at the same time.
Life Insurance
If your spouse, children, business partners, or other family members depend on you financially, personally owned life insurance can protect them.
Life insurance can also be useful in retirement-income planning. For example, some retirees intentionally choose higher lifetime annuity payouts and use cash value life insurance or term coverage to replace assets for heirs.
Depending on your needs, options can include term life insurance, guaranteed universal life insurance, whole life insurance, indexed universal life insurance, and survivorship life insurance.
Long-Term Care Insurance
The biggest retirement expenses aren’t always vacations and groceries. Long-term care can significantly affect an otherwise solid retirement plan.
Coverage options can include traditional long-term care insurance, hybrid life and long-term care insurance, long-term care annuities, and life insurance with chronic illness or long-term care benefits.
If you are healthy enough to qualify, buying coverage earlier can provide significantly more options than waiting until a medical diagnosis makes coverage difficult or impossible to obtain.
Disability Insurance
If you’re still working and depend on your income, disability insurance deserves consideration.
This is particularly important for self-employed individuals, physicians, attorneys, executives, consultants, business owners, and high-income professionals.
Your retirement strategy doesn’t work particularly well if an illness or injury prevents you from earning enough to continue funding it.
Health Insurance
If leaving the business or employment arrangement also affects your health insurance, make sure you know exactly when the existing coverage ends.
You may need to evaluate individual health coverage, continuation coverage, a spouse’s employer plan, or Medicare depending on your age and circumstances.
Do not create an unnecessary health-insurance gap while focusing exclusively on your retirement account.
What We Recommend
Don’t cash out your Keogh Plan simply because you’re leaving.
First, determine whether you can or should leave it where it is.
Then compare that with rolling it into an IRA.
If another qualified retirement plan accepts the assets and offers attractive terms, compare that option too.
If you’re approximately age 40 or older and predictable retirement income is important to you, get quotes for an IRA annuity with a guaranteed lifetime withdrawal benefit.
Then compare the numbers.
Don’t rely on somebody telling you an annuity is always good.
Don’t rely on somebody telling you annuities are always bad either.
Look at what your money can actually produce.
Compare future guaranteed income, investment growth potential, liquidity, fees, market risk, death benefits, taxes, withdrawal flexibility, and insurance-company financial strength.
Then determine which combination solves your problem.
For many people, the answer isn’t putting 100% of the money into one strategy.
You may want one portion of your retirement assets invested for long-term growth and another portion creating guaranteed lifetime income.
The goal isn’t merely accumulating the largest statement balance. The goal is eventually turning the money you’ve saved into sustainable, predictable, and consistent retirement income.
Get Free Keogh Plan Rollover and Annuity Quotes
If you have a Keogh Plan and are considering a rollover, The Annuity Expert can help you compare your options at no charge.
We can compare IRA annuities from multiple insurance companies and show you how much guaranteed lifetime income different strategies could provide based on your current age, retirement savings, and desired retirement date.
You’ll be able to compare the contractual guarantees before deciding whether an annuity makes sense.
Contact The Annuity Expert’s financial advisors and insurance agents for free quotes and the best coverage to fit your new path.
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