How to Cash in a SEP IRA

by Terry Masters, studioD

An individual retirement account (IRA) can provide the ability to save for retirement through a self-directed process that does not rely on a company-sponsored retirement plan. A simplified employee pension (SEP) IRA is a type of IRA designed for small businesses and the self-employed. With a SEP IRA you decide which financial institution to use to set up the account, as well as the type of investments the account should hold. The account is in your name, and you can make deposits into or withdrawals from the account or liquidate it at your own discretion. However, you must follow the Internal Revenue Service (IRS) distribution rules for this type of retirement account or face paying an early withdrawal penalty.

Cashing in a SEP-IRA After Age 59 1/2

Contact the institution with which you set up the account. The account is in your name, even if you have an employer who has been contributing money to the account. The money in your SEP-IRA is vested, which means that once your employer deposits it into the account, it belongs to you, even if you quit your job the next day.

Withdraw money from the SEP-IRA using the financial institution's withdrawal method. A SEP-IRA is self-guided. Once you reach the age of 59 1/2, the IRS allows you to withdraw some or all of your money from this account at your own discretion. If the account has been opened for less than five years, however, you must wait until you reach the age of 60 to withdraw money without penalty. Your financial institution will report your withdrawals from this account to the IRS.

Report the distribution from your SEP-IRA as ordinary income on your federal income tax return. If you cash out your entire account in one year, the entire amount will be taxed as income to you. This can create a significant tax liability, particularly if the amount in the account moves you into a higher tax bracket.

Cashing in a SEP-IRA Prior to Age 59 1/2

Contact the financial institution that holds the SEP-IRA ,and instruct it liquidate the entire account or withdraw a lesser amount, as needed. Follow the institution's withdrawal or account closure procedures. The institution will report the distribution to the IRS.

Report the distribution as income on your federal income tax return. Indicate if the early distribution qualifies for one of the exceptions allowed by the IRS to negate the 10 percent early withdrawal penalty. The exceptions are to buy a first home, pay for higher education or extraordinary medical costs, or defer the costs of disability or death.

Complete IRS Form 5329, known as Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, if you do not qualify for an early withdrawal exception. This form will compute the taxes and penalty amount owed on the distribution from the SEP-IRA account. Attach the form to your federal income tax return and submit the return to the IRS with payment for any outstanding taxes owed.


  • If you are younger than 59 1/2 and need to take money out of your SEP-IRA, you can take a 60-day loan from the account without incurring an IRS penalty. However, if you don't return the money to the account within 60 days, you will have to pay state and federal income taxes on the distribution in addition to a 10 percent early withdrawal penalty to the IRS. Alternatively, if you rollover your SEP-IRA into a company-sponsored retirement plan, such as a 401(k) or profit-sharing plan, you can borrow up to half of the balance in the account tax- and penalty free.

About the Author

Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. Masters holds a Juris Doctor from Howard University and a Bachelor of Science in business administration with a minor in finance from the University of Southern California.