SEP contributions and earnings are held in SEP IRA and can be withdrawn at any time, subject to general limitations imposed on traditional IRAs. A withdrawal is taxable in the year it is received. If a participant withdraws before age 59 and a half, an additional 10% tax generally applies. Its distribution may be exempt from penalties if it is part of a series of substantially equal periodic payments (SEPP).
SEPP distributions must be made annually and for five years or until you turn 59 and a half years old, whichever comes later. If distributions change, the 10% penalty tax, plus interest, applies retroactively to all previous distributions. A SEP-IRA is one of the easiest small business retirement plans to set up and maintain. You can make significant contributions for yourself and for any eligible employee.
There is little administration and no tax filing is required. And contributions can vary from year to year or even skip a year. Since the SEP's IRA distribution rules allow account holders to withdraw funds at any time, staff members have the added advantage of greater flexibility in the event of a financial emergency. If the account holder needs to withdraw funds from their IRA SEP account before their 59th birthday and a half, these withdrawals are subject to an additional 10% tax penalty for early distribution, in addition to being counted as taxable income.
Since contributions to SEP IRAs are subject to deferred taxes, the IRS established rules to ensure that funds are eventually withdrawn from the protected account. While the SEP IRA aims to provide financial security during retirement, it has the added advantage of the flexibility to make withdrawals at any time and for any reason, although an early withdrawal penalty may apply. This includes SEP IRAs and other types of individual retirement accounts, such as Roth and traditional IRAs. The main difference between a traditional IRA and an SEP IRA is that contributions to the SEP IRA are made exclusively by the employer.