How to Liquidate a Simplified Employee Pension Plan (SEP) IRA

Liquidating your SEP IRA gives you instant cash.
Liquidating your SEP IRA gives you instant cash. (Image: Jupiterimages/Comstock/Getty Images)

Your SEP IRA funds are intended to sit in your retirement plan until you reach your golden years. That being said, many people find it necessary to tap into their retirement savings early for various reasons. You can liquidate your SEP IRA at any time with no questions asked. Keep in mind, however, that you will pay IRS early-withdrawal penalties if you liquidate your fund prior to age 59 1/2.

Contacting the IRA Custodian

Contact your SEP IRA custodian -- the financial institution that holds the account -- and notify it of your intent to liquidate your SEP IRA’s balance. Discuss any paperwork that requires your attention and the best way to obtain and return it, such as via email, fax or snail mail. Make certain that you understand what your custodian needs to begin processing your liquidation.

Submitting the Paperwork

Fill out and sign the required paperwork, and return it to your SEP IRA’s custodian with any requested documentation. Note that paperwork will vary depending upon where your SEP IRA is housed, but usually requires that you sign a termination form of some sort. Once your plan’s custodian has your paperwork, it generally takes approximately 10 business days for you to receive your liquidated IRA funds. Depending on how your funds are invested, it might take a little longer, so be patient. Ask your custodian for an approximate ETA of your money.

Filing IRS Form 5329

If you are under 59 1/2 years old, go the IRS website and download Form 5329 for the tax year in which you liquidated your SEP IRA. Unless you liquidated your IRA for qualified reasons as designated by the IRS, you will be assessed a 10-percent early withdrawal penalty on your liquidation. Qualified reasons include becoming permanently disabled, using the funds to pay for certain higher education expenses, purchasing your first home, paying medical expenses or being called into active military duty. If you are over 59 1/2, you do not need to fill out Form 5329.

Tax Reporting

You must also report your liquidated IRA on Form 1040 for the tax year in which you withdrew the funds. SEP IRA accounts are considered traditional IRAs and are pre-tax, as you didn’t pay taxes when you stashed the money away. Therefore, you need to pay taxes on the income now. Chances are your IRA’s custodian withdrew 25 percent for the IRS when it made the distribution. It is important, however, to ensure that you report and pay the proper amount of income tax on your liquidated funds. Otherwise, you might face additional IRS penalties.


Think seriously before doing any of this. Prematurely withdrawing your SEP IRA gives the IRS more of your retirement savings in penalties and gives you less of your saved money. This alone is something to think about before liquidating the IRA. In addition, once you withdraw the money and spend it, it won’t be there when you are ready to retire and need it most.

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