Table of Contents
What are the SEP IRA withdrawal rules?
What are the required minimum distributions?
The bottom line
What Are the SEP IRA Withdrawal Rules For 2022?
Jun 9, 2022
4 min read
Prior to retirement age, these contributions and earnings can be accessed and used to cover a variety of costs but early withdrawals are subject to added tax penalties.
When it comes to saving for retirement, small-business owners often prioritize solutions that allow for flexibility with low costs. One type of self-employed retirement savings account that fits this bill is the SEP IRA, or simplified employee pension plan.
SEP IRAs are simple to establish and maintain, and enable business owners to contribute to IRA retirement plan savings for themselves as well as their eligible employees. They have higher contribution limits than traditional and Roth IRAs, but fewer expenses and requirements than 401(k)s. They also allow account holders to choose how those savings get invested.
Since SEP IRAs are intended to be a retirement savings vehicle, the IRS has specific guidelines surrounding withdrawal and use of these funds.
There are federal rules an individual may want to consider before pulling money out of a SEP IRA. Whether there are penalties or taxes involved can depend on factors such as circumstance and age.
Once an individual reaches age 59 ½, they can begin to withdraw money—both contributions and earnings—from an IRA penalty-free, if they choose. This includes SEP IRAs as well as other types of individual retirement accounts, like Roths and traditional IRAs. With SEP IRAs, withdrawals after age 59 ½ are counted as taxable income for that year.
Any withdrawal made from an IRA before age 59½ is considered an early withdrawal, and a 10% penalty plus income tax on the withdrawn amount usually apply.
When an account holder makes an early withdrawal, that amount is added to their taxable income on Form 1040 for that tax year. The funds are subject to income tax along with the rest of the earnings for that year, based on their overall tax rate.
Additionally, the individual may be required to fill out a Form 5329. This form accounts for any extra taxes due on withdrawals in addition to standard income tax.
IRA withdrawal rules state that funds can be withdrawn from the account as early as age 59 ½, and are required to be withdrawn starting at age 72. However, there are some exceptions that allow for early withdrawals from a SEP IRA without penalty.
If the account owner passes away, their beneficiaries can withdraw funds without meeting the age requirement.
If the plan participant is totally and permanently disabled, they can utilize their IRA savings at an earlier age.
IRA funds can be used to pay for qualified higher education expenses.
Up to $10,000 can be withdrawn from a SEP IRA without an early withdrawal penalty, as long as the funds are being used by a first-time homebuyer to purchase a primary residence.
If the plan owner incurs unreimbursed medical expenses that exceed 10% of his or her AGI for the year, they can withdraw funds from a SEP IRA to help cover the difference. SEP IRA savings can also be used to pay for health insurance premiums while the account owner is unemployed, without penalty.
Certain distributions may not be subject to the early distribution tax if withdrawn by a qualified reservist called to active duty military service.
Unlike 401(k) plans, IRAs do not permit loans. If the account holder needs to withdraw funds from their SEP IRA prior to age 59 ½, these withdrawals are subject to an additional 10% early distribution tax penalty, in addition to being counted as taxable income. Withdrawn funds cannot be repaid at a later date.
Once the account holder reaches the age of 72, SEP IRA distributions are required. These required minimum distributions, or RMDs, must be taken from the SEP IRA each year, beginning with the year that the account owner turns 72. These are required whether or not the individual is still working, and even if they don’t actually need access to the funds.
The required distribution amount will vary, and is calculated based on the account balance and the retiree’s age, using IRS life expectancy charts. RMDs help ensure that the retiree is able to use most of their own retirement savings during their lifetime.
Another option for meeting the RMD requirement is to make qualified charitable distributions. That means charitable donations can be made to a qualified charitable organization, with funds paid out directly from the IRA.
SEP IRA plans are intended to provide small-business owners and their employees with flexible retirement savings options that are relatively easy to set up with few administrative hassles. SEPs also offer higher contribution limits, than say, a traditional IRA. Upon reaching retirement age, these funds can be withdrawn and used to cover a variety of costs, including everyday retirement expenses.
Prior to reaching retirement age, these contributions and earnings can be accessed, but early withdrawals are subject to added tax penalties. Once reaching the age 72, distributions are required by the IRS—even if the funds are not needed at that time.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
SEP IRA vs. SIMPLE IRA: Key Differences That Affect Your Retirement
There are many similarities, both are options for self-employed individuals, as well as small-business owners looking to offer retirement savings as an employee benefit.
SEP IRA Benefits For Small Business Owners & Employees
Learn all about why a SEP IRA can come with many benefits and how it offers a wide variety of investment options, flexible contributions, and high annual limits.
How to Open a SEP IRA
Understanding how to open a SEP IRA is pretty simple, and the process can be done through many financial institutions including a brokerage or insurance company.
SEP IRA vs. Solo 401(k): Differences for Self-Employed People
Retirement saving plans are important, Solo 401(k) plans and SEP-IRAs offer options for self-employed individuals, choosing the right one depends on different factors.