SEP IRA Withdrawal Rules


Simplified Employee Pensions help small business owners and self-employed individuals provide retirement savings for themselves and their employees. Each SEP is a traditional IRA account set up and funded by the employer. Internal Revenue Service withdrawal rules for SEP IRAs are the same as those that apply to traditional IRAs.

Distribution Basics

Once an employer deposits money in your SEP IRA, it belongs to you. You can withdraw it at any time. Employers may not prohibit or set conditions on withdrawals. Contributions are pre-tax, meaning you don’t pay income taxes on money an employer adds to a SEP IRA. Contributed dollars and investment earnings are not taxable until they are withdrawn.

When funds are distributed from a SEP IRA, they are subject to income taxes just like any other income. This tax-deferred status means the money grows tax-free. In return, the IRS wants you to refrain from pulling money out of your SEP account until you are 59 1/2 years old.

SEP IRA Early Withdrawal

Although you can take SEP IRA funds out of your account whenever you choose, the IRS imposes a 10 percent penalty tax on early distributions. This rule doesn’t apply if you inherit the SEP IRA. The IRS makes several other exceptions to the penalty, though you still have to pay income taxes on the distributed funds. The exceptions from the early-withdrawal penalty are:

  • Withdrawals made as a reservist called to active duty for 180 days
  • Money to pay an IRS levy
  • Annuity payments
  • Money withdrawn after you suffer permanent disability
  • Payment of medical expenses in excess of 10 percent of adjusted gross income
  • To pay health insurance premiums while out of work
  • Money used to pay higher education expenses
  • Money for refurbishing or buying a first home

Required Minimum Distributions

The IRS won’t let you leave money in a SEP IRA indefinitely. You must start making annual minimum distributions the year you reach age 70 1/2. You have until April 1 of the following year to make the first distribution. In later years, the minimum distribution must occur by December 31. The exact amount you have to take out is determined by your life expectancy according to IRS guidelines. Failure to make a required minimum distribution is very costly. The IRS hits you with a 50 percent penalty on top of income taxes due.

A Word about Rollovers

It is okay to transfer money from a SEP IRA to a traditional IRA. This isn’t considered a distribution, so you don’t pay a penalty or income taxes. You must either tell the SEP IRA trustee to transfer the money on your behalf or deposit the withdrawn funds into the new account within 60 days. You also can move money into a Roth IRA, but you have to pay income taxes on the rollover because only after-tax dollars can go in a Roth.

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