Simplified employee pension individual retirement arrangements, or SEP IRAs, allow employers to sponsor a retirement plan and make contributions on behalf of employees. Like other IRAs, you can take distributions from your SEP IRA whenever you want, including your employer’s contributions on your behalf, but you might owe extra tax penalties.
Qualified distributions from an SEP IRA include any withdrawal you take after you've turned 59 1/2 years old. When you take a qualified withdrawal, you still must pay taxes on the distributions, but you don't have to pay any penalties. The income is taxed at your ordinary income tax rate, not as capital gains, so the amount of tax you'll pay depends on which income tax bracket you fall in.
Any withdrawal from your SEP IRA before you turn 59 1/2 years old gets hit with not only income taxes, but also a 10 percent additional tax penalty because you're taking an early withdrawal. Suppose you take out $12,000 when you're 56 years old. Not only does that $12,000 add to your taxable income, but it will also cost you $1,200 in tax penalties. The only way to avoid the penalty is if an exception applies.
SEP IRAs use the same early withdrawal penalty exceptions as traditional IRAs, which means there's no generic "hardship" exception to the early withdrawal penalty. Instead, you must qualify under one of the specific exceptions. For example, if you're permanently disabled or are taking a qualified reservist distribution, you don't have to pay the early withdrawal penalty no matter how much you withdraw. Alternatively, the portion of your withdrawal used for medical premiums when you're out of work or for higher education expenses for you, your spouse or your kids is also excepted.
Requesting a Withdrawal
To take a withdrawal from your SEP IRA, you just need to fill out a distribution request form, which is available from the financial institution that keeps your SEP IRA. The form requests your name and other identifying information, like your Social Security number, and your account information. You also need to specify how you want the money paid to you, such as via check or directly into another account, but you don't have to explain what you'll use the money for, even if you're taking an early distribution.