SEP IRA Distributions and RMDs: Rules, Penalties, and Deadlines

SEP IRA distributions and RMDs follow the same federal tax rules as traditional IRA withdrawals: every dollar you take out counts as ordinary income, and any withdrawal before age 59½ carries a 10% early withdrawal penalty on top of income tax. Once you reach the required age, the IRS makes you start taking money out whether you need it or not. That age is 73 if you were born between 1951 and 1959, or 75 if you were born in 1960 or later.¹

How Withdrawals Are Taxed

SEP IRA contributions go in pre-tax, so the IRS collects on the way out. Every withdrawal is taxed as ordinary income at your federal rate for that year, and state income tax applies too unless you live in a state without one. Long-term capital gains treatment does not exist here, no matter how long the money sat or how much it grew.

Large withdrawals can push you into a higher bracket. Take $80,000 from your SEP IRA in a year when you already have $60,000 in other income, and you are paying tax on $140,000 of combined income. Spreading distributions across multiple years, when the situation allows, softens that bracket creep.

The 10% Penalty for Withdrawals Before 59½

Money pulled before age 59½ gets hit with a 10% additional tax on top of ordinary income tax.² A $20,000 early withdrawal in the 22% bracket costs you $4,400 in income tax plus $2,000 in penalty, leaving you with roughly two-thirds of what you took.

Federal law lets you avoid the 10% penalty (though not the income tax) in several situations:

Total and permanent disability, meeting the IRS definition of a condition expected to last indefinitely or result in death.
First-time home purchase, up to a $10,000 lifetime limit for buying, building, or rebuilding.²
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (only the excess qualifies).²
An IRS levy against the account itself.
Birth or adoption, up to $5,000 per event, taken within a year.³
Domestic abuse, up to $10,000 (indexed for inflation) within one year of the abuse, available since 2024.³
Emergency personal expenses, one withdrawal per year up to $1,000.³

Your custodian reports the distribution on Form 1099-R, but proving you qualify for an exception is your responsibility at tax time. Keep records.

Substantially Equal Periodic Payments

One exception has its own commitment attached. Under the substantially equal periodic payments rule, sometimes called 72(t) payments, you can set up a schedule of roughly equal withdrawals based on your life expectancy and take them before 59½ without the penalty. The trade-off: once the payments start, you cannot change the amount or stop them until the later of five years from the first payment or reaching age 59½.⁴ Modify the schedule early and the IRS applies the 10% penalty retroactively to every distribution you already took, with interest.

When Required Minimum Distributions Begin

Eventually the IRS wants its tax on all that deferred money. Your first RMD is due by April 1 of the year after you reach the applicable age, and every RMD after that is due by December 31 of the year in question.⁵

That April 1 first-year deadline hides a trap. If you delay your first RMD to April 1, you still owe the second RMD by December 31 of that same year. Two RMDs land in one tax year, which can push you into a higher bracket. Taking the first RMD during the year you actually reach the applicable age avoids the problem.

The 5% Owner Point

Some employer plans let workers who are still on the job defer RMDs until they retire. That exception does not apply to anyone who owns 5% or more of the sponsoring business.⁶ Most SEP IRA holders are self-employed or own the business outright, which means the “still working” delay is off the table. You must begin RMDs at 73 or 75 regardless of whether you are still earning income.

Combining RMDs From Multiple IRAs

If you hold more than one traditional IRA or SEP IRA, you calculate the RMD for each separately, then take the total from any one account or any combination.⁷ You can draw down a weak performer while a stronger account keeps growing. The aggregation rule stays inside the IRA family, though; you cannot use an IRA withdrawal to satisfy a 401(k) RMD or the reverse.

Calculating the RMD

The math is direct. Take your SEP IRA balance as of December 31 of the prior year and divide it by the life expectancy factor for your current age. Most people use the Uniform Lifetime Table in IRS Publication 590-B.⁷ A 75-year-old with a $500,000 balance and a factor of 24.6 owes about $20,325.

One exception to the standard table: if your sole beneficiary is a spouse more than 10 years younger than you, you can use the Joint Life and Last Survivor Expectancy Table, which produces a larger divisor and a smaller required withdrawal.⁷

Penalty for a Missed RMD

Falling short of the required amount triggers a 25% excise tax on the shortfall. Owe $20,000, take only $12,000, and you pay 25% on the missing $8,000, or $2,000. Correct the shortfall within two years and the rate drops to 10%.⁶ There is little reason to leave a missed RMD unaddressed given how much the timely correction saves.

Qualified Charitable Distributions

If you are 70½ or older and give to charity, a qualified charitable distribution sends money directly from your IRA to a qualifying charity without counting the distribution as taxable income.⁸ For 2026, the annual QCD limit is $111,000.⁹ A QCD can also satisfy your RMD for the year.

Two requirements matter. The custodian must send the payment directly to the charity; if the money touches your account first, it does not qualify. And for SEP IRAs, QCDs are only available from accounts that are inactive for the year, meaning no SEP contribution was made to that account for the tax year in which you want to make the QCD. If contributions are ongoing, use a different IRA.

Inherited SEP IRA Rules

Distribution rules change when a SEP IRA passes to a beneficiary. A surviving spouse has the most options: roll the inherited account into their own IRA and reset the RMD clock to their own applicable age, or keep it as an inherited account and take distributions over their own life expectancy.¹⁰ The spousal rollover usually maximizes continued deferral.

For deaths in 2020 or later, most non-spouse beneficiaries must empty the entire inherited account by the end of the tenth year after the original owner’s death. No annual minimum applies during those ten years, but the account must be fully distributed by the deadline. A narrow group of eligible designated beneficiaries can still stretch distributions over their own life expectancy: minor children of the deceased owner (until the age of majority, when the 10-year clock starts), beneficiaries who are disabled or chronically ill, and individuals no more than 10 years younger than the original owner.¹⁰

Moving Money Without Triggering a Distribution

Not every exit from a SEP IRA is a taxable withdrawal. You can transfer funds to another traditional IRA, a new SEP IRA, or in some cases an employer plan like a 401(k), without owing tax, provided you follow the rules.

A direct trustee-to-trustee transfer is cleanest. Your custodian sends the money straight to the receiving account, nothing is withheld, and no clock runs.¹¹ Direct transfers do not count toward the one-rollover-per-year cap.

An indirect rollover is riskier. The custodian sends you a check (with 10% withheld for federal taxes unless you opt out), and you have 60 days to deposit the full original amount, including the withheld portion, into another eligible retirement account. Deposit less than the full amount and the difference becomes a taxable distribution. Miss the 60 days and the whole amount is taxable, plus the 10% early withdrawal penalty if you are under 59½. Only one indirect rollover is allowed per 12-month period across all your IRAs combined; a second within that window is taxable.¹¹

Requesting the Distribution

The mechanics are simpler than the tax rules. Most custodians accept distribution requests through their online portals, though phone or mailed paperwork may be required for some transaction types. You will specify the amount and your federal tax withholding. The default withholding rate on IRA distributions is 10%; you can elect a higher rate or opt out entirely.¹² Opting out does not erase the tax. It just moves the bill to April. State withholding rules vary.

Processing usually takes three to five business days, with electronic transfer to a linked bank account the fastest option. The following January, your custodian will issue Form 1099-R showing the gross distribution, the taxable amount, and the distribution code that tells the IRS what type of withdrawal it was.¹³ Keep the form. The IRS gets a copy, and you will need yours to file.

1
Congress.gov. Required Minimum Distribution (RMD) Rules for Original Account Owners
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. Substantially Equal Periodic Payments
5
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans – Section: Required Distributions
6
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
7
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
8
Internal Revenue Service. Seniors Can Reduce Their Tax Burden by Donating to Charity Through Their IRA
9
Internal Revenue Service. Notice 2025-67
10
Internal Revenue Service. Retirement Topics – Beneficiary
11
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
12
Internal Revenue Service. Pensions and Annuity Withholding
13
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498