General Rules

• An SEP account is an Individual Retirement Account that is governed by the same set of regulations that apply to traditional IRAs. All contributions and earnings in an SEP IRA are supposed to remain in the account until you reach age 59 1/2. Early withdrawals that don't meet IRS criteria as an exception incur a penalty tax of 10 percent of the amount withdrawn in addition to income taxes. However, your employer may not impose any other restrictions or penalties and may not prohibit you from making withdrawals from an SEP IRA. Note that you must pay income taxes on any funds withdrawn just as you would with a traditional IRA.
  
  

Medical Expenses

• The 10 percent penalty tax does not apply if you use the money to pay medical bills not reimbursed by insurance that exceed 7.5 percent of your adjusted gross income. Only the excess over the 7.5 percent threshold qualify. You can also pay health insurance premiums with SEP money if you are unemployed and receive unemployment compensation for at least 12 weeks. These provisions apply only to you, your spouse and children or grandchildren. Finally, you may withdraw money without penalty if you become disabled.
  
  

Home and Education

• SEP funds may be withdrawn without incurring the penalty tax if they go toward the purchase, construction or rebuilding of a first home, up to a limit of $10,000 over the life of the SEP fund. You may also take out money to pay qualified expenses for higher education; this is limited to you or a member of your immediate family. The amount withdrawn cannot be greater than the educational costs after funding from other sources such as student loans, wages and gifts are subtracted.
  
  

Other Exceptions

• Beneficiaries who inherit SEP IRAs may withdraw the funds at any time. Some annuity payments may also be taken out penalty-free. If you must pay an IRS levy with money withdrawn from your SEP IRA, there is, again, no penalty. Finally, a qualified reservist distribution is penalty-free. For a reservist distribution to be qualified, you must be called to active duty for more than 179 days and the withdrawal must take place between the time you are called up and the time you are released from active duty.