• Skip to primary navigation
  • Skip to main content
Good Financial Cents®
Content is based on in-depth research & analysis. Opinions are our own. We may earn a commission when you click or make a purchase from links on our site. Learn more.
  • Make Money
    • Get Money Now
      • Ultimate Guide to Making Money
      • Need Money Now
      • Get Free Money Fast
      • Make Money Fast
      • Make $1K Per Month
    • Control Your Destiny
      • Self Employed Jobs
      • Make Money from Home
      • Hobbies That Make Money
      • How to Become a Freelance Writer
      • Small Business Ideas to Start
      • How to Become an Independent Contractor
      • Best Online Jobs
    • Passive Income
      • Passive Income Ideas
      • Multiple Streams of Income
      • Extra Income
      • Residual Income Ideas
      • Learn to Sell e-Books
      • Make Money on Facebook
      • Make Money on Tiktok
      • Best Online Survey Sites to Make Money
    • Explore More
      • Make Money for Teens
      • Best Online Colleges
      • Best Jobs No College Degree
      • Become a Millionaire
      • Careers for the Future
  • Manage Money
    • Best Of
      • Budgeting Tools
      • Personal Finance Software
      • Best Cashback Cards
    • Company Reviews
      • Personal Capital vs Mint
      • Personal Capital Review
      • SmartAsset Review
    • Guides
      • Buy or Lease a Car
      • What is Liquid Net Worth?
      • Setting Financial Goals
      • How to Budget
      • Ways to Save Money
    • Explore More
      • How Much Car Can I Afford?
      • Best Auto Refinance Companies
  • Invest
    • Best Of
      • Best Short and Long-Term Investments
      • Best Low Risk Investments
      • Best Online Stock Brokers
      • Best Crypto Exchanges
      • Best Short Term Investments
      • Best Long Term Investments
      • Best Trading Platforms
      • Best Investment Apps
    • Company Reviews
      • Lending Club
      • Robinhood
      • M1 Finance
      • Ally
      • TD Ameritrade
      • Fundrise
      • Betterment
      • Etrade
      • Wealthfront
    • Guides
      • Investing for Beginners
      • Investing Small Amounts of Money
      • Investing in Real Estate
      • No Money Down Real Estate
      • Bonds vs Stocks
      • Peer to Peer Lending
      • Best Hedges Against Inflation
      • Safe Bitcoin Investing in 2022
    • Explore More
      • Bitcoin vs. Real Estate
      • Betterment vs Wealthfront
      • Investing for College Students
      • Stock Market Alternatives
    • By Investment Amount
      • How to Invest $100
      • How to Invest $1K
      • How to Invest $5K
      • How to Invest $10K
      • How to Invest $20K
      • How to Invest $50K
      • How to Invest $100K
      • How to Invest $200K
      • How to Invest $500K
      • How to Invest $1M
  • Taxes
    • Best Of
      • Best Tax Relief Companies
      • Best Tax Software
    • Guides
      • Federal Income Tax Guide 2022
      • Taxes and Cryptocurrency
      • How to Do Your Own Taxes
      • How to Invest Your Tax Refund
      • Hiring a Professional Tax Preparer
      • Tax Tips for Freelancers
    • Company Reviews
      • TurboTax Review
      • H&R Block Review
      • Taxslayer
      • Tax Act
  • Insurance
    • Best Of
      • Best Life Insurance
      • Best Home Insurance
      • Best Auto Insurance
      • Cheap Term Life Insurance
      • Car Insurance For Young Adults
    • Guides
      • Term vs Whole Life
      • Different Types of Car Insurance
      • Average Cost of Car Insurance
    • Explore More
      • Life Insurance Over 50
      • Life Insurance Over 80
      • $1 Million Life Insurance
      • $2 Million Life Insurance
      • $3 Million Life Insurance
    • Company Reviews
      • Banner Life Insurance
      • Ladder Life Insurance
      • Health IQ
      • Haven Life
      • Policygenius
      • State Farm Auto Insurance Review
  • Retirement
    • Roth IRA
      • Best Places to Open a Roth IRA
      • Best Investments for Roth IRA
      • 7 Roth IRA Secrets
      • Roth IRA Conversion Guide
      • Roth IRA Rules
      • Roth IRA vs Roth 401k
      • Are Roth IRA Contributions Tax Deductible?
    • 401(k)
      • 401(k) Limits
      • 401(k) to Roth Rollover
      • Is 401(k) Enough for Retirement?
      • Maxed Out 401(k): What's next?
    • Traditional IRA
      • Traditional IRA Rules and Limits
      • Traditional IRA vs. 401(k)
      • Simple IRA Rules
      • SEP IRA Rules
      • How Much Do You Need to Start an IRA?
    • Explore More
      • SEP IRA vs. Roth IRA
      • 457 Plan for Successful Retirement
      • 401a Rollover Rules
      • How to Retire at 50
      • How to Retire at 55
  • Banking
    • Best Of
      • Best National Banks
      • Best High-Yield Savings Accounts
      • Best Checking Accounts
      • Best Savings Accounts
      • Best CD Rates
      • Best Money Market Accounts
    • Company Reviews
      • BBVA
      • Synchrony
      • Wells Fargo
    • Explore More
      • 9 Banking Alternatives for 2022
      • What is a Credit Union?
  • Home
    • Best Of
      • Best Mortgage Lenders
      • Best Mortgage Refinance Companies
      • Best Home Warranties
      • Best Homeowners Insurance
      • Best VA Loans
      • Best Mortgage Rates
      • Best Moving Companies
      • Best Home Security
    • Guides
      • Home Buying Checklist
      • Online Home Appraisal
      • How Much House Can I Afford?
      • First-time Homebuyer Programs
      • How to Get Approved for a Home Loan
      • Save Money When Building a House
      • How to Save for a Downpayment
      • When to Refinance Your Mortgage
    • Explore More
      • 15 vs. 30-year Mortgage
      • Home Warranty vs. Home Insurance
      • Veterans United Home Loan Review
      • Quicken Loans Review
      • HELOC vs Second Mortgage
      • DCU Mortgage Review
      • Costco Mortgage Program Review
      • USAA Mortgage Loan Review
  • Credit
    • Best Of
      • Best Credit Repair Companies
      • Best ID Theft Protection Services
      • Best Credit Report Options
      • Best Bad Credit Loans
    • Guides
      • How to Build Your Credit Score
      • How to Raise Your Credit Score in 5 Months
      • How to Dispute Your Credit Report
      • Hot to Remove Collections from Your Credit Reports
      • How Identity Theft Destroys Your Credit Score
    • Explore More
      • What is a Good Credit Score?
      • What is a Bad Credit Score?
  • Debt
    • Best Of
      • Best Debt Consolidation Loans
      • Best Personal Loans
      • Best Student Loans
      • Best Student Loan Refinance
    • Guides
      • How to Get Out of Debt
      • How to Get a Personal Loan Approved
      • How to Pay Off Student Loans Faster
      • Should I Consolidate My Debts?
      • Should I File for Bankruptcy?
    • Company Reviews
      • Credible
      • Sofi
Advertiser Disclosure (How We Make Money)
GoodFinancialCents.com has an advertising relationship with the companies included on this page. All of our content is based on objective analysis, and the opinions are our own. For more information, please check out our full disclaimer and complete list of partners.

Distribution Rules for SEP IRAs

Jeff Rose, CFP® | September 07, 2021

When I crossed over from W-2 employee to being self-employed and co-founded our investment firm, I was excited about the plethora of business retirement plans that I now had at my disposal.

One such option (which ended up being the one I went with) is the Simplified Employee Pension (SEP) IRA. A SEP IRA and traditional IRA is the contribution limits imposed. In 2010, the contribution rules for the SEP are allowable for the lesser of either 25% of your self-employment net earnings; or $49,000. For 2020, the maximum contribution is $57,000, and for 2021, the maximum contribution is $58,000.

The other similarity between an SEP IRA and a traditional IRA is the distribution rules. The distribution of both the IRA account and SEP IRA must be taken at some point but some distributions are elective and others will be forced.

Penalties and taxes that are applied to both distributions will be dependent on the age of owner at the time of distribution as well as the tax deductions of the assets during the contribution time. Before the age of 59 ½, any early withdrawal will be subjected to a 10% penalty. This is in addition to federal income tax imposed.

Exceptions for Deferral of the 10% Early Withdrawal Penalty

Below are some exceptions for deferral of the 10% early withdrawal penalty.

Money Used for Medical Expenses

If withdrawal is made to pay non-reimbursable medical costs, any amount going over 10% of the adjusted gross income of the individual for the year will not incur the early withdrawal penalty.

Money Used to Pay Medical Insurance

A penalty-free distribution can be used to pay medical insurance for the individual, their spouse, and any dependents as long as the distribution is necessary due to job loss.

This can happen if unemployment benefits have been paid by state or federal agencies for 12 consecutive weeks. The person would receive distributions during the year they received unemployment compensation, or for the next year. Also, the person would receive distributions no later than 60 days after reemployment occurs.

Money Used for a Disability

When an individual becomes disabled before the age of 59 ½ and takes a distribution from their IRA account, the distribution does not incur a penalty. Proof of the disability from a licensed medical provider must be shown that either a mental or physical condition prevents the individual from finding gainful employment.

Money Used to Purchase a First Home

Monies can be withdrawn penalty-free if the funds are used to purchase, build, or remodel a first home for the account holder, their spouse, child, grandchild, or a parent of the account holder. The monies must be used to pay eligible acquisition costs before the end of the 120th day of receiving the distribution of funds. 

The funds withdrawn for a first home purchase also can’t be more than $10,000 during the account owner’s lifetime for single individuals. Married couples can withdraw a lifetime total of $20,000.

Money Used for Tax Levy

Monies in an IRA account can be levied by the IRS if taxes are owned which result in a distribution amount. Any distribution amounts will not incur a penalty fee.

Money Used for Educational Expenses

If monies are being used to fund the expenses of higher education of the owner or the dependents of the owner, the amounts will be penalty free. 

Education expenses that are eligible include tuition, books, supplies, and school fees as part of a requirement for enrollment in an eligible college, university, vocational school, and other post-secondary school participating in student aid programs through the Department of Education.

Beneficiary Distributions

For the SEP program, penalty-free distributions are made from a series of equal payments and must last five years or until the owner reaches the age of 59 ½, whichever time period is longer.

For IRA beneficiaries, if the owner of the account dies before having reached age 59 ½, the distribution amounts for the beneficiary are not penalized.

Bottom Line

If you want to take an early distribution from your SEP IRA, be sure to consult with your tax preparer before making the withdrawal. The rules above are general, and can be affected by your personal tax situations.

Facebook LinkedIn Twitter

About the Author

Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

Facebook Twitter LinkedIn


You Might Also Enjoy

What Happens to Your 401k When you Die?

What Happens to Your 401k When you Die?

Can You Have Multiple IRA (Traditional or Roth) Accounts?

Can You Have Multiple IRA (Traditional or Roth) Accounts?

Should You Rollover Your Pension Into an IRA?

Should You Rollover Your Pension Into an IRA?

5 Best Investments for Roth IRA in 2022

5 Best Investments for Roth IRA in 2022

Social Security Disability Benefits + Application Guide

Social Security Disability Benefits + Application Guide

The Ultimate Roth IRA Conversion Guide - Everything You Need to Know

The Ultimate Roth IRA Conversion Guide - Everything You Need to Know

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

  • Make Money
  • Manage Money
  • Invest
  • Taxes
  • Insurance
  • Retirement
  • Banking
  • Home
  • Credit
  • Debt
  • About
  • Contact
  • Do Not Sell My Personal Information
  • Facebook LinkedIn Twitter

© 2022 Good Financial Cents®. All Rights Reserved. | Privacy Policy | Disclaimer | Licenses & Disclosures

All written content on this site is for information purposes only. Opinions expressed herein are solely those of AWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

All third party trademarks, including logos and icons, referenced in this website, are the property of their respective owners. Unless otherwise indicated, the use of third party trademarks herein does not imply or indicate any relationship, sponsorship, or endorsement between Good Financial Cents® and the owners of those trademarks. Any reference in this website to third party trademarks is to identify the corresponding third party goods and/or services.