Keogh Plan Distribution Rules: Taxes, Penalties, and Rollovers

Keogh plan distribution rules mirror the rules for other qualified employer plans: no penalty-free withdrawals before age 59½, required minimum distributions starting at 73 or 75 depending on your birth year, and ordinary income tax on every dollar you pull out. A few wrinkles hit self-employed owners harder than salaried employees, particularly around RMDs and the exceptions to the 10% early withdrawal penalty.

When You Can Take Money Out

The clean answer is age 59½. Once you reach that age, you can withdraw from your Keogh without the 10% additional tax, though you still owe regular income tax on the amount.¹

A distribution can also become available earlier if you permanently stop your self-employment activity, become totally and permanently disabled, or die. Disability has to meet the standard under Internal Revenue Code Section 72(m)(7): a physician-certified condition that prevents any substantial gainful activity and is expected to be long-lasting or fatal.² Death triggers a distribution to your named beneficiary or your estate.

Most Keogh plans do not allow in-service withdrawals before 59½ while you’re still actively self-employed. The plan document controls, and almost all of them are written to block access until retirement age, separation from service, or a qualifying hardship event.

The 10% Early Withdrawal Penalty

Take money out before 59½ and you generally owe a 10% additional tax on top of ordinary income tax. The IRS applies it automatically unless a specific exception fits your situation.¹

Exceptions That Waive the Penalty

Each of the following lets you avoid the 10% penalty. Ordinary income tax still applies to the distribution; only the penalty is waived.

Death. Distributions to a beneficiary or your estate are penalty-free at any age.²
Total and permanent disability certified by a physician under the Section 72(m)(7) standard.²
Separation from service after age 55. If you stop your self-employment during or after the year you turn 55, later distributions avoid the penalty.²
Substantially equal periodic payments. A series of roughly equal payments calculated over your life expectancy using one of three IRS-approved methods (required minimum distribution, fixed amortization, or fixed annuitization). Payments must continue for at least five years or until you turn 59½, whichever comes later; break the schedule and the penalty applies retroactively to every prior payment.³
Qualified domestic relations order. A distribution to a former spouse or other alternate payee under a divorce court order is penalty-free for the recipient.¹
Unreimbursed medical expenses above 7.5% of your adjusted gross income for the year.¹
IRS levy against the plan to collect unpaid taxes.²
Terminal illness certified by a physician, with no dollar cap.¹
Emergency personal expenses. One withdrawal per year up to $1,000, provided the distribution does not drop your balance below $1,000. Repayable within three years.⁴
Domestic abuse victims. Up to $10,000 (indexed) or 50% of your account balance, whichever is less, within one year of the abuse. Repayable within three years.
Federally declared disasters. Up to $22,000 per qualifying disaster, with the option to spread the income over three years or repay within three years.

Exceptions That Do Not Apply

Several well-known penalty exceptions apply only to IRAs, not to qualified employer plans like a Keogh. You cannot take a penalty-free early distribution from a Keogh for first-time homebuyer costs, qualified higher education expenses, or health insurance premiums while unemployed.¹ If you need retirement money for one of those, the withdrawal has to come from an IRA.

How Distributions Are Taxed

Every dollar out of a Keogh is ordinary income in the year you receive it. Your contributions went in pre-tax and reduced your self-employment income at the time, so the IRS taxes the full withdrawal at your marginal rate. State income tax may apply too, and treatment varies: some states fully exempt qualified retirement distributions, some offer partial exclusions tied to age or income, and some tax every dollar.

Your plan custodian reports the distribution on Form 1099-R, which arrives by early February of the following year.⁵ Box 1 shows the gross distribution, Box 4 shows federal tax withheld, and Box 7 carries a distribution code telling the IRS whether an exception applies to the early withdrawal penalty.

A narrow carve-out exists if the plan holds after-tax contributions (basis). In that case, part of each distribution comes back tax-free under a pro-rata formula. In practice, most Keogh plans hold only pre-tax contributions and earnings, so the entire withdrawal is fully taxable.

Required Minimum Distributions

Once you hit RMD age, the IRS forces annual withdrawals whether you need the money or not. Under the SECURE 2.0 Act, the age depends on your birth year:

Born 1951–1959: RMDs begin at age 73.
Born 1960 or later: RMDs begin at age 75.

Your first RMD is due by April 1 of the year after you reach RMD age. Every RMD after that is due by December 31. Delaying that first distribution to April 1 means two RMDs land in the same calendar year, which can push you into a higher bracket.⁶

Miss the required amount and the penalty is a 25% excise tax on the shortfall. That rate drops to 10% if you correct the shortfall within two years.⁶

Some qualified plans let employees who keep working past RMD age delay distributions until they actually retire. That exception is off-limits to anyone owning more than 5% of the business. Since sole proprietors own 100% by definition, every Keogh owner starts RMDs on schedule regardless of whether they’re still working.

Rolling the Money Over to Defer Tax

If you don’t need the cash, rolling your Keogh assets into another qualified account keeps the tax deferral running. The IRS offers two methods, and one is dramatically safer than the other.

Direct Rollovers

In a direct rollover, the plan custodian sends the money straight to the receiving account. No check to you, no withholding, no distribution treatment.⁷ This is the clean path.

Indirect (60-Day) Rollovers

With an indirect rollover, the plan cuts the check to you. The custodian must withhold 20% for federal income tax before the check leaves.⁷ You then have 60 days from receipt to deposit 100% of the original distribution into an eligible retirement account.⁸

Here’s where indirect rollovers unravel. To complete a full rollover, you have to come up with the withheld 20% out of your own pocket and deposit it alongside the net check. Deposit only the net proceeds and the withheld 20% is treated as a taxable distribution, plus the 10% penalty if you’re under 59½. The withholding eventually comes back as a tax credit when you file, but only if you fronted the difference in the first place. The IRS may waive the 60-day deadline for casualty, disaster, or circumstances beyond your control, though the waiver is not automatic.

Where Keogh Assets Can Go

Keogh distributions can roll into any of these, as long as the receiving plan accepts incoming rollovers:⁹

Traditional IRA
SEP IRA
Another qualified employer plan such as a 401(k) or 403(b)
Governmental 457(b) plan
SIMPLE IRA, but only after two years have passed since your first contribution to the SIMPLE IRA¹⁰
Roth IRA, with the entire converted amount taxable as ordinary income in the conversion year; qualified withdrawals from the Roth are tax-free later⁹

A Roth conversion can pay off if you expect a higher tax rate in retirement or want to escape future RMDs, since Roth IRAs have none during the owner’s lifetime. The tradeoff is a potentially large tax bill in the conversion year.

Plan Loans and Deemed Distributions

If your Keogh document allows loans, you can borrow from your own account without a taxable event, as long as the loan meets IRS rules. The maximum is the lesser of $50,000 or 50% of your vested balance (with a $10,000 floor). The $50,000 cap is reduced by your highest outstanding loan balance from the prior 12 months.¹¹

Repayment must be at least quarterly in level installments, and the term generally cannot exceed five years (longer for a primary residence). Miss a payment and you get a grace period through the end of the calendar quarter following the quarter the payment was due. After that, the outstanding balance plus accrued interest becomes a deemed distribution.¹²

A deemed distribution is ordinary income and can trigger the 10% penalty if you’re under 59½. The trap: you owe tax on money you already spent, with no cash on hand to pay the bill. If you take a loan from your Keogh, leave margin in the payments so a slow quarter doesn’t become a tax event.

Spousal Consent

If your Keogh is structured as a defined benefit or money purchase pension plan, federal law requires distributions to be paid as a qualified joint and survivor annuity unless your spouse signs a written waiver. The waiver must name the alternate beneficiary or payment form, acknowledge the effect of giving up the survivorship benefit, and be witnessed by a plan representative or notary.¹³

If your Keogh is a profit-sharing plan (the more common defined contribution version), the QJSA rules generally do not apply unless the plan document adopts them. Most profit-sharing Keoghs skip the requirement, but check your document before you assume. If consent is required and you take a distribution without it, the plan administrator risks disqualifying the plan. One exception: if the total benefit is $7,000 or less, the plan can cash you out in a lump sum without spousal consent.

1
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
2
Office of the Law Revision Counsel. 26 US Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Substantially Equal Periodic Payments
4
Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
5
Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
6
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
7
eCFR. 26 CFR 31.3405(c)-1 Withholding on Eligible Rollover Distributions; Questions and Answers
8
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
9
Internal Revenue Service. Rollover Chart
10
Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
11
Internal Revenue Service. Computation of Maximum Loan Amount Under IRC Section 72(p)(2)(A)
12
eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions
13
Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity