Withdrawal Penalties for a SEP IRA

• Early SEP IRA withdrawals can result in penalties as well as tax liability.tax forms image by Chad McDermott from Fotolia.com
  
  SEP stands for "simplified employee pension," a type of individual retirement account. SEP IRAs are tax-deferred accounts, which means that contributions are tax-deductible and aren't subject to income taxes until you withdraw money. To discourage people from abusing the tax breaks of SEP IRAs, the Internal Revenue Service penalizes early withdrawals and required withdrawals you don't take. SEP IRAs follow the same distribution rules and penalties as traditional IRAs.
  
  

Early Withdrawal Penalty

• The IRS imposes a 10 percent penalty on withdrawals taken from an SEP IRA before you reach age 59 1/2. This penalty is on top of any income taxes you would owe. For example, if you took a $14,000 early withdrawal, you would owe a $1,400 tax penalty and you would have to report an additional $14,000 of taxable income. The IRS does not impose the penalty if you use the money for qualified higher education costs or medical costs that exceed 7.5 percent of your adjusted gross income, or if you suffer a permanent disability.
  
  

No Makeup Contributions

• The IRS does not permit people to contribute extra money in the event of an early withdrawal, even if the withdrawal is for a financial hardship. Once you remove the money from the account, you cannot make extra contributions in future years to replenish your retirement savings. This can permanently limit how much you can save using your SEP IRA.
  
  

Failure to Withdraw Required Minimum Distributions

• Like traditional IRAs, SEP IRAs require minimum distributions starting in the year you turn 70 1/2 years old. You must take these required minimum distributions or you will owe a 50 percent penalty on the amount of money not withdrawn. For example, if you are required to take out $12,000 and you withdraw none, you would owe a $6,000 penalty. If you take out only $5,000 when your required withdrawal is $12,000, you would owe a penalty of $3,500, or 50 percent of the $7,000 not withdrawn.