How to Take Out SEP Money Before Retirement

A simplified employee pension individual retirement account -- or SEP IRA -- is a good way for the owner of a small business to create an effective retirement program for himself and his employees. An employer sets up the system, but employees create individual accounts, like a traditional IRA, with tax on contributions deferred until retirement. You can take money out of your SEP IRA any time you want, but taking it out prior to retirement age usually will incur a heavy penalty.

Tax Penalties

Any money you take out of your SEP IRA before you are 59 1/2 is subject to two tax penalties. First, it's taxed as ordinary income. Second, it's subject to a 10 percent penalty. That is, if you withdraw $5,000, you'll pay tax on that amount plus a $500 penalty for early withdrawal. Once you're 59 1/2, withdrawals aren't limited, even if you're not retired.


You can take money out of your SEP IRA without penalty or tax if you roll it over into another IRA or similar tax-deferred retirement plan. You also can roll it into a Roth IRA, but you'll have to pay income tax on the amount rolled over because a Roth plan is funded with after-tax dollars. However, interest on a Roth is tax-free and you won't pay taxes on money you take out after retirement.

Medical and Disability

You also can withdraw money from your SEP IRA without penalty to pay costs of a sudden disability, such as a crippling accident or illness, or to pay medical expenses that exceed 7.5 percent of your adjusted gross income. You won't escape income taxes, but you will be exempt from the 10 percent penalty.

College and Home Expenses

If the money withdrawn from a SEP IRA is used to pay college tuition for yourself, your spouse or your children, or for a first-time home purchase, you will not be penalized. The college exemption extends to grandchildren for older SEP IRA holders. The first-time home purchase exemption is limited to $10,000. Again, you'll pay income tax on the money you take out, but not the 10 percent penalty.

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