Simplified Employee Pension (SEP) IRAs Withdrawals

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Simplified Employee Pension (SEP): (source: retirementliving.com)

A Simplified Employee Pension (SEP) is a voluntary retirement plan that an employer can establish for employees and also for themselves. Each year, an employer can decide whether it wishes to make an annual contribution to each qualified employee through this retirement plan. These funds must be deposited into a traditional Individual Retirement Account or Annuity (IRA). The employee is then free to decide how these employer contributions should be allocated within their IRA.

It is a “simplified” retirement plan since the employer (typically self-employed individuals) is not required to submit any type of form or paperwork to the IRS. In contributing to this plan, the employer must adhere to certain rules and requirements as spelled out in IRS form 5305-SEP, the contents of which are discussed below. In addition, some of the more important rules and regulations are summarized. These voluntary employer-sponsored retirement plans are also compared to other self-funded retirement plans, like traditional IRAs. 

What are SEP IRA Rules?

Withdrawal Rules

Because contributions to a SEP IRA must be invested in a traditional IRA, someone withdrawing their funds from a SEP IRA must follow the traditional IRA withdrawal rules. SEP IRA owners can withdraw the contributions and earnings from their IRA at any time.

An account owner is immediately vested in 100% of all SEP IRA contributions and earnings. There is no vesting or waiting period.

However, early withdrawals (which occur before age 59½) from a SEP IRA account will require the payment of a 10% penalty along with the payment of any income taxes due.

There are some exceptions to this rule. IRA holders may be able to avoid this 10% penalty based on the following scenarios:

• For certain qualified higher education expenses

• For using the withdrawn funds to buy, build or rebuild a first home

• For paying unreimbursed medical expenses that exceed a certain percentage of adjusted gross income

• For being in the military and being called to active duty for more than a certain number of days

• Becoming totally and permanently disabled

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