Understand the Hidden Penalties, Taxes, and Timing Rules That Apply to Your Self-Employed Retirement Account
Scenario
You’re a self-employed individual or a small business owner with a Keogh plan—an older type of tax-deferred retirement plan. Now you’re ready to take money out or nearing retirement, but you’re unsure about withdrawal rules, required minimum distributions (RMDs), or the taxes involved.
1. Withdrawals Before Age 59½ Come With a 10% Penalty
Key Stat: 10% early withdrawal penalty applies before age 59½
Keogh plan withdrawals are taxed as ordinary income. If you take money out before age 59½, you’ll also pay a 10% early withdrawal penalty—unless you qualify for an IRS exception (such as disability or substantial medical expenses).
✔ Tax-deferred growth until withdrawal
✘ 10% penalty before age 59½
✘ Ordinary income taxes apply
Who Needs It: Those under 59½ who must tap into savings due to financial hardship or emergencies.
Who Doesn’t: Anyone who can wait until retirement or who has other accessible savings.
Helpful Add-on: Consider using a Fixed Index Annuity with a GLWB rider to create guaranteed income later without early withdrawal risks.
2. Required Minimum Distributions Begin at Age 73 or 75
Key Stat: Required Minimum Distributions begin at the applicable RMD age—generally 73 for people born from 1951 through 1959 and 75 for people born in 1960 or later
Keogh plans are subject to the same RMD rules as other qualified retirement accounts. You must start taking distributions by April 1 of the year after you turn 73 (or 75 if born in 1960+), even if you’re still working.
✔ Required distributions prevent tax deferral forever
✔ RMD amount based on IRS life expectancy tables
✘ Penalty for missing an RMD is 25% of the required amount
Who Needs It: Retirees age 73+ who must follow IRS rules to avoid penalties.
Who Doesn’t: Those with Roth IRAs or Roth 401(k)s, which don’t require RMDs.
Helpful Add-on: A Qualified Longevity Annuity Contract (QLAC) can delay RMDs up to age 85 and reduce current RMD amounts.
3. You Must Fully Distribute the Account Upon Plan Termination
Key Stat: All assets must be distributed when the Keogh plan is terminated
If you close your Keogh plan, you must distribute the entire account, which can cause a large tax hit unless rolled over into another qualified account like a traditional IRA.
✔ Rollovers preserve tax deferral
✔ Plan termination gives control over funds
✘ Full distributions are fully taxable if not rolled over
✘ May push you into a higher tax bracket
Who Needs It: Business owners shutting down the plan or retiring and consolidating retirement accounts.
Who Doesn’t: Those still actively contributing or using the Keogh plan as their primary savings vehicle.
Helpful Add-on: Rolling over into a Fixed Annuity or IRA can help preserve tax advantages and structure payouts over time.
Also Consider: Add Life Insurance to Your Retirement Plan
Permanent life insurance can provide tax-free death benefits and cash value growth alongside your Keogh plan. It helps cover final expenses or leaves a legacy—without RMDs or penalties.
✔ Tax-deferred growth and tax-free loans
✔ Can supplement retirement income or cover estate taxes
Great For: Self-employed professionals with high incomes looking to diversify retirement income streams.
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