What types of distributions can be taken from a SEP?
There are several distribution types that can be taken from a SEP-IRA. We briefly summarize each distribution type below:

Normal distribution occurs after the owner attains age 59½. A normal distribution is generally subject to taxation in the year withdrawn, but the 10% early withdrawal penalty tax does not apply.
Premature distribution (without an exception) occurs upon the owner withdrawing funds before age 59½, and an exception does not apply. The distribution is both taxable and subject to a 10% penalty tax.
Premature distribution (with an exception) occurs upon the owner withdrawing funds before age 59½ and satisfying an exception. Although the distribution is subject to taxation, the 10% penalty tax does not apply

The following are common exceptions to the 10% penalty tax on early withdrawals:

Substantially equal periodic payments (“Rule 72(t)”)
Qualifying disability
Death of the IRA owner
Qualified higher education expenses
A distribution that is no more than the amount paid for health insurance premiums after receiving unemployment benefits for more than 12 weeks
Unreimbursed medical expenses (greater than 7.5% of adjusted gross income)
First-time home purchase (lifetime limit of $10,000)
Qualified birth or adoption
Qualified reservist
IRS levy
Federally declared disaster
Terminal illness
Domestic Abuse
Required minimum distribution (RMD)
60-day withdrawal and rollover

What are the minimum distribution requirements?
A SEP-IRA account owner must receive a required minimum distribution (an “RMD”) the year he or she attains the applicable age as follows:

Age 72 for individuals who attain age 72 on or prior to December 31, 2022
Age 73 for individuals who attain age 72 after December 31, 2022, and before January 1, 2033
Age 75 for individuals who attain age 74 after December 31, 2032

The RMD rules permit the initial minimum distribution to be deferred until April 1 of the following year. Delaying an initial RMD requires the account owner to take two RMDs the following year. An RMD must be taken annually thereafter.

If the full RMD is not taken each year, a 25% penalty tax is assessed on the amount that should have been received. However, if the missed RMD is corrected by the end of the second taxable year after the year in which the RMD should have been made, the penalty tax is reduced to 10%. See our calculator to determine your RMD.

An individual age 72 or older is eligible to participate, assuming SEP IRA eligibility requirements have been satisfied. However, the individual must also take required minimum distributions.

What is a 60-day withdrawal and rollover?
Once in a 12-month period (not calendar year), a SEP-IRA owner may withdraw any amount, for any reason, from any of their IRAs, and repay the funds within 60 days without being subject to taxation or an early withdrawal penalty. If not repaid within their 60-day window, the SEP-IRA owner will be subject to taxation and potential penalties.

The one IRA rollover per year applies on a per-taxpayer basis. Therefore, a SEP-IRAowner can elect a single 60-day withdrawal and rollover in a 12-month period regardless of the number or type of IRAs owned.³

What death benefits are available from a SEP IRA?

When a SEP-IRA account owner dies, an inherited IRA is established. However, the treatment of an inherited IRA differs, depending on who inherits the account.

Please note that the rules applicable to inherited IRAs are complex and vary substantially depending on facts and circumstances. The general rules set forth below are not intended as legal, financial, or tax advice and we recommend that you consult with your advisor or tax professional based on your individual situation.

Spousal beneficiary:

A spousal beneficiary has the following options available upon inheriting a SEP-IRA:

Treat the IRA as his or her own IRA
Roll over the IRA into his or her own IRA
Transfer the IRA to an employer-sponsored retirement plan where he or she is a participant
Remain a beneficiary
Elect to be treated as the deceased spouse (i.e., delay required minimum distributions until the year in which the deceased spouse would have reached age 73)

Non-Spouse Beneficiary:
The Setting Every Community for Retirement Enhancement (SECURE) Act introduced changes to long-standing rules that apply to retirement accounts inherited by a non-spouse beneficiary. The new rules generally apply to beneficiaries that inherit an IRA on or after January 1, 2020.

One such change was the elimination of the “stretch IRA” for most non-spouse designated beneficiaries and the introduction of a “10-Year Rule,” thus requiring certain non-spouse beneficiaries to liquidate the entire balance of their inherited retirement account within ten years after the account owner’s death.

Can I convert a SEP-IRA to a Roth IRA?
Yes. Investors regardless of age and/or income are eligible to convert all or a portion of their assets to a Roth IRA. Distributing pre-tax IRA assets to a Roth IRA via a conversion is a taxable event, subject to taxation in the year the conversion takes place.

Retirement Savings Solutions