Saving for retirement with a SEP IRA can offer valuable tax advantages, but those benefits also come with rules when it’s time to take money out. 

Contributions are made with pre-tax income, which can lower your taxable income now while allowing your investments to grow tax-deferred. Like a Traditional IRA, you can take withdrawals at any time. However, taking money out before age 59 1⁄2 typically means paying ordinary income taxes plus a 10% additional tax, unless you qualify for an exception.

Read on to understand how SEP IRA withdrawals work, including the tax treatment, penalties, and situations that may help reduce or avoid extra charges.

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When Can You Withdraw From a SEP IRA?

You can begin taking penalty-free withdrawals from a SEP IRA once you reach age 59 ½. Since contributions are made with pre-tax dollars, any money you withdraw in retirement is taxed as ordinary income.

SEP IRAs follow the same distribution and penalty rules as Traditional IRAs. Other retirement accounts have different guidelines. For example, Roth IRAs generally have no lifetime required minimum distributions (RMDs) and handle withdrawal taxes differently, while SIMPLE IRAs may impose a 25% additional tax on withdrawals taken within the first two years of participation.

Are Withdrawals From a SEP IRA Taxed?

Yes. Because a SEP IRA is funded with pre-tax dollars, contributions reduce your taxable income now, but the taxes are deferred until you take money out. Qualified withdrawals in retirement are taxed as ordinary income.

The amount you’ll owe depends on your tax bracket and the rates in effect at the time you withdraw the funds.

What Are the Penalties for Withdrawing Early?

Taking money out of a SEP IRA before age 59½ generally triggers two costs:

Together, these can significantly reduce how much you actually receive.

Can the 10% Penalty Be Waived?

Yes, in specific cases. The 10% penalty doesn’t apply in certain situations, but regular income taxes still do. Here are the most common penalty exceptions:

✅ Death or Disability – If you pass away or become disabled, you or your beneficiaries can take distributions without the 10% penalty.

✅ Qualified Higher-Education Expenses – The penalty exception applies to qualified costs for you, your spouse, children, or grandchildren.

✅ First-Time Home Purchase – Up to $10,000 (lifetime, per individual) from IRAs can be used without the 10% penalty if you (and your spouse, if married) haven’t owned a principal residence during the previous two years.

✅ Unreimbursed Medical Expenses – The exception applies when expenses exceed 7.5% of your adjusted gross income (AGI) for the year.

✅ Health Insurance Premiums During Unemployment – Applies only if you received unemployment compensation for at least 12 consecutive weeks and take the distribution in the same year (or the next) within 60 days after reemployment.

❌ Eviction or Foreclosure – IRAs, including SEP IRAs, don’t have a penalty exception for this hardship category. That rule applies to some 401k plans only, not IRAs.

📝 Note: Even if the 10% penalty is waived, SEP IRA withdrawals are still taxed as ordinary income. This can affect your tax bracket for the year you take the distribution.

Can You Take Out a Loan From a SEP IRA?

No, SEP IRAs do not allow loans. The only way to access money from your account is through a withdrawal, which may be subject to taxes and penalties if taken before age 59½.

By contrast, a Solo 401k allows loans of up to 50% of the account balance (capped at $50,000).

Required Minimum Distributions (RMDs) From a SEP IRA

A SEP IRA is subject to required minimum distributions (RMDs). Starting at age 73, you must take withdrawals from your account each year until the balance is depleted.

The amount of each RMD is based on:

✅ Your Account Value – The balance as of December 31 of the previous year.
✅ Your Life Expectancy – Determined using the IRS life expectancy tables.

If you miss all or part of an RMD, the IRS imposes an excise tax equal to 25% of the amount not taken. This may be reduced to 10% if corrected quickly.

📝 Note: Checking the current IRS RMD tables annually helps ensure you’re withdrawing the right amount and avoiding penalties.

Withdrawal Rules for Employees

Employees cannot make their own contributions to a SEP IRA. All contributions come from the employer. By law, the employer must contribute the same percentage of compensation for every eligible employee.

✏️ Hypothetical Example: 

If an employer contributes 25% of their own compensation to their SEP IRA, they must also contribute 25% of each eligible employee’s compensation to their SEP IRA.

📝 Note: Although employees can’t contribute, the contributions made by the employer are always 100% vested immediately. This means you own the money right away and control how it’s invested in your account.

When it comes to withdrawals, the same rules apply to employees as to business owners. Penalty-free distributions can begin at age 59½. Early withdrawals typically result in a 10% penalty plus ordinary income taxes on the amount withdrawn.

Can You Rollover a SEP IRA Into Another Plan?

Yes. SEP IRA funds can be rolled over into other retirement plans such as a Traditional IRA or a Solo 401k.

A rollover may make sense if you’re an employee who received SEP IRA contributions from a former employer or if you’re self-employed with no full-time employees and want to move funds into a Solo 401k.

✏️ Hypothetical Example: 

You could roll over your SEP IRA into a Solo 401k and then use the Solo 401k’s loan feature. A Solo 401k lets you borrow up to 50% of your account balance (up to $50,000) with repayment generally within five years. Loans for buying a principal residence may have a longer term if the plan allows. The IRS also expects a reasonable interest rate but doesn’t mandate a specific “Prime + 1–2%” formula.

A Few Notes to Keep in Mind

✅ Tax-Free Rollovers to Similar Accounts – Moving SEP IRA funds to a Traditional IRA or Solo 401k is typically tax-free.

✅ Taxes on Roth Rollovers – Rolling over to a Roth account such as a Roth IRA triggers income taxes because the tax treatment is different.

✅ Employer Contributions and Income – Employer contributions to a SEP IRA are not included in an employee’s income. Self-employed individuals can deduct their SEP contributions within limits.

✅ Taxation of Withdrawals – SEP IRA distributions are taxed as ordinary income when withdrawn. Roth accounts tax contributions upfront but generally allow qualified withdrawals to be tax-free in retirement.

In Summary

A SEP IRA can provide tax-deferred growth and employer-funded contributions, but it also comes with specific withdrawal rules. Taxes apply to distributions, and taking money out before age 59½ generally leads to an additional penalty unless an exception applies. Required minimum distributions also begin at age 73.

It may be worth reviewing your long-term plans before taking money out or moving funds to another account. Comparing different retirement plans, reviewing the IRS rules, or consulting with a qualified tax professional could help you decide on the most suitable approach for your situation.

📌 Also read: Can You Lose Money in a Roth IRA? Mistakes To Avoid


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