I have a SEP IRA and contributions were taxed due to my income and employer 401K. I'm 62. Can I withdraw the funds without paying additional taxes? If not now When?

[kstamba103]

What are my options for withdrawing the taxed contributions? For investment? Roth IRA?

[GeoffreyG · Accepted solution]

At age 62, you are over the minimum age (59-1/2) for taking penalty-tax free distributions from your retirement account; while you are still under the age (70-1/2) where you must begin taking what the tax law refers to as "Required Minimum Distributions."

For withdrawal purposes, and rules, SEP IRAs are treated just the same way as are regular, traditional, IRAs.

If you contributed after-tax money (i.e., made nondeductible contributions) to your SEP IRA, then you have what is known as "basis" in your SEP IRA.

As quoted from IRS Publication 590-B:

"If you made nondeductible contributions or rolled over any after-tax amounts to any of your tradi-tional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions.  These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.

Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free.  If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any).  Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable."

So, to answer your primary question, yes, you can take SEP IRA distributions without fear of penalty taxes.  As for ordinary income taxes, you would have to pay tax on the portion of your withdrawal(s) that represent investment earnings, while your return of basis is simply a tax-free return of original contribution(s).

As what you can do with your SEP IRA money, you could take the distributions and spend them, you could roll them over into a Roth IRA or another type of IRA, you can consolidate them with your 401(k) money, etc.

This is a very detailed topic, and we cannot possibly delve into all contingencies here.  But we would, respectfully, encourage you to read, or at least keep as a further reference, IRS Publication 590-B (Distributions from IRAs).  He is a direct link to it:

https://www.irs.gov/pub/irs-pdf/p590b.pdf

In addition, if you would like to discuss some of these issues privately with an agent, then please follow the instructions on our "Contact" webpage to be connected with one of our live tax professionals:

https://support.turbotax.intuit.com/contact/

Thanks for asking about such an important issue, and we hope you will enjoy your retirement.

Regards

[dmertz]

Nondeductible SEP-IRA contributions are not permitted.  If you reported nondeductible contributions, they were reported as regular individual traditional IRA contributions, not SEP-IRA contributions.  Regardless, all of your traditional IRAs, including SEP and SIMPLE IRAs must be combined when calculating the proportion of a distribution from your traditional IRAs that is a nontaxable distribution of basis in nondeductible contributions.  Only if your basis exceeds the total of your 2016 year balances in IRA plus distributions from your IRAs in 2016 would the distributions be entirely nontaxable.

There *is* a method that can be used to separate the basis from the before-tax money in your IRAs that involves rolling over the before-tax money to your 401(k), but the complexities are beyond the scope of this forum.

[TuckerdogAVL]

Sorry to barge in but I can’t seem to ask a question that is new, I can only reply to existing answers. I am 66 and would like to withdraw money from an IRA to fund the IRA. I understand I will pay taxes on that next year, but it is a lot less than the total Fed taxes if I do this. Is it okay? Since the IRA is just taxed as income anyway? 

[KrisD15]

You can take a distribution and later make a contribution in the same year if that is what you want to do. 

Is that what you are asking? 

[dmertz]

As KrisD15 said, there is nothing to prevent you from taking an IRA distribution and using that money to make an IRA contribution in the same year.  The only purpose would be to be able to make a deductible contribution for the prior year to shift taxable income to the current year.  Be aware, though, that such a distribution would likely prevent you from being eligible for several years for any Retirement Savings Contributions Credit for which you might otherwise be eligible, so just make sure that you aren't doing something that has a net negative effect on your tax liability over several years.

[TuckerdogAVL]

Yes. I want to take $5K out of an IRA and SEP to then use that toward the same IRA and SEP accounts for 2019 in order to reduce taxes paid. My fed tax more than doubles if I don’t make the contributions. Seems sillier not to do this, then worry about the taxes for 2020. 

[TuckerdogAVL]

Have no idea what your referring to. What is the Retirement Savings Contribution Credit. 

Okay, searched and read this. Only Employer sponsored thing I have is my SEP, which is me, so I don't think this will apply. Asterisk, footnote 🙂

[dmertz]

Correct.  Other than salary-reduction contributions to a SARSEP established before 1997, SEP contributions are employer contributions and employer contributions are not considered when determining the amount of a Retirement Savings Contributions Credit for which you might be eligible.  However, distributions from the SEP-IRA are IRA distributions that would reduce the amount of the credit for which you might otherwise be eligible if you made a regular personal IRA contribution or an elective deferral to a qualified retirement plan like a 410(k).

[TuckerdogAVL]

So, if I take additional distributions from both my IRA and my SEP this year (prior to July 15th I assume now?) And then re-contribute those funds to the IRA and the SEP, then what happens?  For example, the total SEP I can currently do is $1900. The IRA, of course, can be up to $6500 $6700? So, I was going to take $5K out of $9K total from the two (haven’t decided where or what yet) then use $2K from another source to contribute to the SEP (1900) and the balance back to the IRA (this are estimates as I’m still working but there aren’t big amounts here) 

[dmertz]

The maximum IRA for someone age 50 or over in 2019 is $7,000.  It seems that you have sufficient compensation from self-employment to support a $7,000 regular IRA contribution, but your participation in the SEP plan means that whether or not a regular traditional IRA would be deductible will depend on your modified AGI for the purpose and your filing status.  Make your proposed contributions into TurboTax to see the result for 2019.  The IRA distributions will be taxable on your 2020 tax return and you likely will be ineligible for any potential Retirement Savings Contributions Credit for several years.

[TuckerdogAVL]

From what I understand I wouldn't be able to get the credits anyway since I'm 66 and self employed.