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Retirement

SEP IRA Withdrawal Rules & Penalties Explained

Contributions to a SEP IRA are made with income that hasn’t been taxed yet. You get a tax deduction each year you contribute and investments in your account grow tax-deferred until retirement.

A SEP IRA has similar withdrawal rules as a traditional IRA. Once you contribute to your account, you cannot withdraw from it until you reach the age of 59½. Any early withdrawals are subject to penalties and fees.

When can you withdraw from a SEP IRA?

You can start taking qualified distributions, without penalties, from your account when you turn 59½ years old. Because a SEP IRA is funded with pre-tax dollars, you pay regular income taxes when you make withdrawals in retirement.

The same rules apply to other individual retirement accounts like the traditional IRA, Roth IRA, and SIMPLE IRA.

Are withdrawals taxed?

Yes. A SEP IRA is funded with pre-tax dollars. You don't pay any income taxes when you make contributions. Instead, those taxes get deferred until retirement. When you take qualified distributions in retirement, the amount withdrawn is taxed as regular income.

The amount you'll have to pay in income taxes is based on your tax bracket and tax rates at the time of withdrawal.

What are the penalties for withdrawing early?

Early withdrawals made before you turn 59½ years old are subject to a 10% penalty, plus income taxes on the amount drawn.

Can the 10% penalty be waived?

Yes, if you withdraw the money for any of the following reasons, the 10% penalty can be waived. You'll still owe regular income taxes when you withdraw from a SEP IRA.

  • Death or disability: If you pass away or become disabled, you or your beneficiaries can withdraw the money without penalties.
  • Education expenses: You're allowed to withdraw from your IRA if you need to use the money to pay for education for yourself, your spouse, children, grandchildren, or any other immediate family members.
  • Buying your first home: Technically, it doesn't need to be your first home. If you haven't owned a principle residence for at least 2 years, you're allowed to take out up to $10,000 in order to pay for a home purchase.
  • Medical expenses: If you need to pay for medical expenses that exceed 10% of your adjusted gross income for the year, you can withdraw from a SEP IRA without penalties.
  • Health insurance premiums: If you're unemployed, you can withdraw money from your SEP IRA to pay for health insurance premiums.
  • Money needed to prevent eviction or foreclosure: If you need to withdraw to pay for money to prevent an eviction or home foreclosure, you can withdraw without penalties from a SEP IRA.

Can I take out a loan from my account?

No. The only way to take out money from your account is through a withdrawal. With a solo 401k, you're allowed to take out a loan up to 50% of your plan value, up to a maximum of $50,000. You do not have that option with a SEP IRA.

Required minimum distributions (RMD)

A SEP IRA has required minimum distributions. Once you turn 72 years old, you're required to start taking distributions from your account each year until your account is emptied. The amount you're required to withdraw is calculated based on your account value as of December 31, the previous year, divided by your life expectancy. Your life expectancy can be viewed using the RMD table on this page.

Failure to take your RMD will result in a steep penalty of 50% of the amount you were required to withdraw. For example, if your RMD for the year was $5,000 you'll be required to fork over $2,500 of it to the IRS.

Withdrawal rules for employees

As an employee, you cannot make contributions to your SEP IRA and can only receive contributions made by your employer. As a rule, your employer is required to make equal percentage contributions to every eligible employee's SEP IRAs. For example, if your employer contributes 25% of their compensation into their accounts, they'll also have to contribute 25% of your compensation into your SEP IRA.

While you're not allowed to make contributions to a SEP IRA, all contributions made by your employer are always immediately 100% vested. You have full ownership and control over how your money gets invested in your account.

The same withdrawal rules apply when you want to take money out from your SEP IRA. You can take qualified distributions when you reach the age of 59½. Any early withdrawals are subject to a 10% penalty plus income taxes.

Can I rollover my SEP IRA into another plan?

Yes. You're allowed to rollover your SEP IRA into another retirement plan, like a traditional IRA or solo 401k.

A rollover could make sense if you were an employee at a company where your employer was sponsoring your SEP IRA. It could also make sense if you're an employer with no full-time employees and want to move your money to the superior solo 401k plan.

For example, you could rollover your SEP IRA funds into a solo 401k, and then take out a solo 401k loan. A solo 401k lets you take a loan up to 50% of your account value, up to a maximum of $50,000. Interest rates are Prime Rate plus one or two percent, and you'll have 5 years to repay the money. If you use the money to purchase a primary residence, you'll have 15 years to pay it back.

Rollovers to a traditional IRA or solo 401k are tax-free. However, rollovers to a Roth account like a Roth IRA will be subject to income tax since tax treatments are different for both accounts.

With a traditional IRA (and SEP IRA), you don't pay taxes on contributions. They get deducted from your income tax and you pay taxes when you withdraw in retirement.

With a Roth account, you pay income taxes when you contribute, but withdrawals in retirement are tax-free.

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