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As with a Traditional IRA, withdrawals from a SEP IRA will be added to your income and taxed accordingly. SEP IRA distributions are meant to occur at retirement age when you're ideally in a lower tax bracket. For instance, you could earn $10,000 and pay 32% in taxes, or you could defer those taxes by contributing that money to a SEP IRA. Perhaps you'll be in a 25% tax bracket when you start taking distributions. Earnings yielded through your alternative IRA investments will bear these same tax advantages.

Below Age 59½

You may distribute cash or assets from your SEP IRA at any time, though a 10% early distribution penalty will apply. This penalty will be assessed on top of any applicable taxes.

Age 59½ - 70½

Upon reaching age 59½, you will no longer have to worry about the 10% early distribution penalty. Withdrawals will be taxed as regular income and need only occur at your election.

Age 70½ or Older

You must begin taking required minimum distributions (RMDs) every year. RMDs are calculated in accordance with your age and your account value.

Required Minimum Distribution FAQs

How do you calculate an RMD?
The base RMD calculation is your end-of-year account value from the previous calendar year (i.e. the value of your account as of December 31st) divided by a factor associated with your age. Other factors may affect the calculation as well, so please consult with your accountant or tax professional.

When is your first RMD due?
Your first RMD will come due April 1st, the calendar year after you turn 70½. For example, if you turn 70½ on January 1, 2018, you have until April 1st, 2019 to take your first RMD. You would make the calculation based on your account value as of December 31, 2017.

After the first one, when are RMDs due in future years?
All subsequent RMDs must be taken by December 31st every year. In our prior example, if you take your first (2018) RMD on April 1st, 2019, you have until December 31, 2019 to take another distribution for 2019 (based on your account value as of December 31st, 2018).

Do you have to take RMDs from every pre-tax account you hold?
You may owe RMDs from multiple accounts, but you're under no obligation to make actual withdrawals from each one. Let's say you have a SEP IRA and a Traditional IRA; you calculate an RMD of $500 for the Traditional IRA and $1,000 for the SEP. You could take those distributions separately, or you could take a $1,500 lump distribution from either account. As long as the cumulative required minimum is satisfied, the IRS doesn't care about which accounts produce the taxable events.

Early Distribution Exemption

You may distribute from a SEP IRA prior to age 59½ and avoid the 10% penalty under the following circumstances:

  • Distributed funds are used to buy, build, or rebuild your first home. Up to $10,000 may be distributed penalty-free in this instance.
  • You owe or seek reimbursement for medical expenses that equal more than 10% of your adjusted gross income (AGI). Medical expenses need only equal 7.5% of your AGI if you or your spouse were born before January 2nd, 1952.
  • Distributions do not exceed the cost of medical insurance while unemployed.
  • Withdrawals qualify as reservist distributions.
  • Distributions do not exceed your qualified higher education expenses.
  • You are permanently and completely disabled.
  • You hold a non-spouse Inherited IRA, from which RMDs will be due regardless of age.
  • You receive distributions as an annuity.
  • The IRS has levied your account.

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