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Level 1

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?

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

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Accepted Solutions
Level 1

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?

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






2 Replies
Level 1

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?

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






Highlighted
Level 20

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?

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.