Guidelines for a SEP-IRA Early Withdrawal

by Cynthia Myers

SEP-IRAs allow self-employed individuals and employees of small businesses to set aside money for retirement. Like other IRAs, you have a choice of investments for your SEP-IRA, and you can deduct your contributions to a traditional IRA from your taxes, up to the maximum allowed by the IRS. You may begin withdrawing money from your SEP-IRA at age 59 1/2, and you must make withdrawals by age 70 1/2. Most early withdrawals before age 59 1/2 will result in a tax penalty.

Withdrawal in Same Year

If you put money into your IRA and decide to take it out before the end of the same year, you won't have to pay a penalty. You can withdraw the money without penalty as long as you take the money out before your tax return is due, usually April 15. If you file an extension, you have until the extension deadline to take the money out without being charged a penalty

Medical Expenses

If you have medical expenses that exceed 7 1/2 percent of your adjusted gross income in one year, you can withdraw money from your IRA to pay these bills. You'll owe taxes on the amount you withdraw, but you won't have to pay the 10 percent penalty for early withdrawal. If you're unemployed, you can use IRA funds to pay medical insurance premiums.

Education

You can withdraw funds to pay education expenses such as tuition, books and educational supplies. The funds must be paid to an accredited educational institution -- a college, university, vocational school or other qualified secondary educational institution. You'll pay taxes on your withdrawal, but avoid the penalty.

Home Purchase

You can withdraw up to $10,000 from your IRA to build or purchase a first home and not have to pay the 10 percent penalty for early withdrawal. You can only do this for your first home. If you and your spouse are each first-time home buyers, you could withdraw up to $10,000 each from your separate SEP-IRAs, for a total of $20,000.

Substantially Equal Periodic Payments

Part 72(t)(1) of the IRS code allows you to avoid the penalty on early withdrawals from retirement plans if you make the withdrawals in substantially equal periodic payments over your projected lifespan. The IRS provides life expectancy tables and three different methods of computing the amount of periodic payments. This prevents you from withdrawing a large sum for a one-time purpose, but could be useful for someone who needs regular income in early retirement. If you stop taking the periodic payments, or modify them substantially, within five years of your initial withdrawal, you'll be assessed the full penalty for all withdrawals you've made thus far.

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