SEP IRA Withdrawal Rules and Penalties

SEP IRA withdrawal rules are the same that apply to Traditional IRAs. A Traditional IRA is the funding vehicle for the SEP plan, so these rules overlap. In general, the rules dictate when an individual can withdraw from an account, how much he or she will be charged for doing so, and whether or not the withdrawal is optional. The rules sound complicated, but there are a few simple things to understand in order to get a grasp on SEP IRA withdrawal rules.

Minimum Retirement Age

Minimum retirement age in the United States is 59-1/2. You cannot begin withdrawing from any traditional IRA or 401k before that point without a penalty. If you retire before this age, you may be eligible for other retirement benefits through social security or the veterans administration. But, in terms of your private retirement accounts, they are still locked down until the year you turn 60.

Mandatory Withdrawal Age

Between 59-1/2 and 70-1/2, you can choose whether or not you want to access your retirement funds. You do not have to take any withdrawals; in fact, you can begin depositing more on an annual basis once you reach age 50. This age is a good time to really increase the money in your accounts. However, once you reach age 70-1/2, you no longer have the option. You must stop putting money into the account, and you must begin taking money out.

Early Withdrawal Penalty

If you take money out of your SEP IRA prior to age 59-1/2, you will have to pay a 10 percent penalty on the withdraw. This penalty comes in addition to the regular taxes you owe. The penalty will be assessed anytime funds are taken out of the account for an extended period of time, even if you plan on completing a rollover. For this reason, it is important to know rollover time lines when you are planning an account change.

Penalty Exceptions

There are two primary exceptions to the 10 percent penalty rule. You can take money out of your account if you are using it to pay for secondary education expenses for yourself or a dependent. You can also take the money out without penalty if you are using the funds as the down payment on your first residence. In both cases, you will still owe money to the IRS as part of your income tax for the year you withdraw from your SEP IRA.

Excess Accumulation Penalty

On the flip side of early withdrawals, there is also a penalty for failing to take mandatory distributions. Once you reach 70-1/2, the IRS wants you to take money out of your IRA at a rate that will bankrupt the account at the exact time of your death. It is rare to actually meet this mark, but this is the goal of mandatory distributions. The IRS uses a formula based on your life expectancy and your total SEP IRA funds to tell you how much to withdraw each year. If you do not do so, the IRS will take out the money for you, and it will assess an extra 6 percent penalty.

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