Can You Borrow From an SEP Account?
SEP, short for simplified employee pension, is a type of retirement plan employers can offer to their employees. It functions according to the rules for tax-deferred individual retirement accounts, or IRAs. Knowing how you can access the money, and which ways are prohibited, can save you money when you are in a financial bind.
Other People Are Reading
-
No Loans
-
Like any other type of IRA, you cannot take out a loan from an SEP IRA. In IRS Publication 590, the regulations state the no money in an IRA can be used to borrow money from nor can you take out a loan and use the SEP as collateral. For example, you could not take out a $10,000 bank loan with the promise that if you did not repay it, the bank could take money from your SEP instead.
Effects of Loans
-
If you use your SEP as collateral for a loan, the IRS treats the SEP as being distributed into a non-qualifying account, even if the money never moves. If you take money out of the SEP, you cannot put it back in. The IRS treats the money as being taken out permanently and, unless you are at least 59 1/2, imposes a 10 percent early withdrawal penalty on top of the income taxes due.
-
Changing Plans
-
Though you cannot take a loan from an SEP IRA, you may be able convert the money from an SEP IRA to another plan that does allow loans, such as a 403b plan or 401k plan. For example, if you changed jobs and work for a company that now offers a 401k plan, you could transfer the money from the SEP IRA into a 401k plan and then use that money to take a loan without any penalties.
Exceptions for Short-Term Rollovers
-
When you move money from one qualified retirement account to another, an option for moving the money is a rollover. With a rollover, the financial institution pays you the money and then you have up to 60 days to put it into another qualified retirement plan. You can even put the money back into the same retirement plan. For example, you could take money out of your SEP IRA and then in under 60 days put it back into the account without having to pay any penalties. For example, if you found a dream house that you needed to close on in two weeks, but your annual bonus doesn't get paid for three weeks, you could take a distribution, pay the down payment and, when you get your bonus, replace the money in your SEP within 60 days.
-
