Simplified employee pensions provide a tax-efficient way for employees and self-employed people to save for retirement. You can make withdrawals or liquidate your SEP IRA at any time. However, withdrawals are subject to taxes, and you may also have to pay early withdrawal penalties. Along with taxes, you may lose a chunk of your nest egg to custodial termination fees and sales charges.
You can participate in a SEP IRA if you are at least 21 years old and have been working for your employer at least three of the last five years. You can establish your own SEP if you are a sole proprietor, run an S corporation or work in a partnership. Your employer funds the account on your behalf. As of 2013, yearly contributions cannot exceed the lesser of 25 percent of your yearly compensation or $51,000. Contributions are tax-deductible, and the account grows on a tax-deferred basis.
Your employer must appoint an investment firm or financial institution to administer your SEP IRA. Plans typically include a variety of investment options, including mutual funds and certificates of deposit. Your employer can terminate the plan at any time. If this occurs, the custodian must notify plan participants so you can make arrangements to disburse the funds. The funds in a SEP are 100 percent "vested." This means the money belongs to you from the outset. Consequently, you can make partial or full withdrawals at any time.
You initiate the liquidation process by contacting your plan custodian. You may have to do this by arranging an in-person appointment with a broker. Many firms allow you to initiate withdrawals over the phone or Internet. You normally have to sign a termination or withdrawal form. You have two liquidation options. You can ask the custodian to disburse the funds through direct deposit or a check. Alternatively, you can arrange a trustee-to-trustee transfer, which involves the current plan custodian depositing the cash directly into another retirement plan. If you receive the funds directly, you have 60 days in which to invest the money in another retirement plan. If you do not, you must report it as taxable income.
SEP withdrawals are subject to ordinary income taxes. You may also pay a 10 percent penalty if you cash in your account before you reach age 59 1/2. You do not pay the penalty if your unreimurbsed medical expenses exceed 7.5 percent of your adjusted gross income. You can also avoid penalties if you become disabled, use the cash to buy your first home or pay college expenses. The exceptions only apply to the 10 percent penalty, not regular income taxes.
Some investment firms impose account closure penalties, which are deducted from your disbursement. If you hold your SEP money in a certificate of deposit or annuity, you may also have to pay early surrender penalties. Additionally, some mutual fund companies impose a back-end sales charge that you pay when you redeem your shares. You could avoid these costs if you arrange to transfer your assets directly to a new custodian. When you do this, the assets in the account are not liquidated but simply passed from one custodian to another. Therefore, you protect your SEP cash from both taxes and custodial fees.
- IRS: SEP Plan FAQs -- Establishing a SEP
- IRS: IRA FAQs -- Distributions (Withdrawals)
- Federal Deposit Insurance Corporation: Certificates of Deposit: Tips for Savers
- Securities and Exchange Commission: Mutual Fund Fees and Expenses
- U.S. Department of Labor: SEP Retirement Plans for Small Businesses
- IRS: SEP Plan FAQs -- Contributions
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