SEP

• A SEP is a way for your employer to contribute money into your IRA. Your employer can contribute up to 20 percent of your salary a year into your IRA through the SEP program. Employees cannot make additional contributions through the SEP plan but can directly invest in an IRA throughout the year. As an IRA, the SEP delays taxation on any funds in the account until retirement. You will owe taxes only on your employer's SEP contributions when you make withdrawals from your IRA in retirement.
  
  

Hardship Withdrawals

• Because a SEP plan is an IRA-based plan, it has no restrictions on plan withdrawals before retirement. If you are enrolled in a 401(k) or pension, you may take an early withdrawal only as a hardship withdrawal. To take a hardship withdrawal, you must prove a financial hardship, such as medical or college tuition expenses, to the IRS. With a SEP, you can take withdrawals at any time. As soon as your employer invests money in your SEP, you may withdraw the contribution for any purpose.
  
  

Withdrawals

• The IRS taxes a withdrawal from your IRA as income in the year it is taken. If you need to take money out of your SEP plan, be prepared to pay income tax on the entire withdrawal. The IRS also charges a penalty on withdrawals from a SEP before retirement. Any withdrawal taken before you turn 59 1/2 is considered an early withdrawal. The IRS charges a 10 percent penalty on early SEP withdrawals in addition to income tax.
  
  

Early Withdrawals

• There are a few exceptions to the early withdrawal penalty for your SEP. If you become disabled, you can take withdrawals from your account penalty-free. You may use your SEP funds to pay medical expenses that exceed 7.5 percent of your annual adjusted gross income. You also may use you SEP funds to pay off higher education expenses. Note that these withdrawals avoid only the 10 percent penalty. You must pay income tax on these early withdrawal exceptions.
  
  

Loans

• A disadvantage of the SEP program is it does not allow plan loans. A company may design its 401(k) to offer plan loans to its employees. An employee can borrow up to $50,000 from his 401(k) account without tax or a penalty, so long as he pays back the loan in five years. The SEP, as an IRA, does not offer plan loans. Be prepared to pay income tax and if necessary, the early withdrawal penalty, on any withdrawals from your SEP.