What happens if I withdraw money from my SARSEP?

May 5, 2003

Subject:  SAR SEP Question
From:  Richard
Date:  Tue, 29 Apr 2003

Mr. Gray:

I read some info that you wrote on SAR SEPs... Due to an emergency, I may have to withdraw a portion [of my SAR SEP] or all of it. Some Questions:

  1. Can I withdraw a portion of it at the 10% federal tax penalty? Or do I have to withdraw it all?

  2. Don't I have to pay state tax as well? If so, what is the tax percentage? I live in New Jersey.

  3. Are the taxes due immediately, or can I defer paying them for a certain period?

Thank you.

Answer

Date:  30 Apr 2003

A SARSEP is a type of individual retirement account (IRA), and subject to the same rules for distributions as IRAs.

  1. You are not required to distribute the entire account balance. If you can either redeposit the amount of the distribution to the same account or to another IRA account within 60 days, the distribution is a rollover and not subject to tax.

  2. Yes, the distribution will be subject to state tax. The tax rate will depend on your income level. The maximum New Jersey individual income tax rate for married, filing jointly with taxable income over $150,000 is 6.37%.

  3. The "default" provisions are for income taxes to be withheld on distributions from an IRA. However, you can elect to have no withholding. The tax will be due on the regular tax due date, April 15 following the year of distribution. Whether there will be a penalty for underpayment of estimated tax depends on whether you meet those requirements, which I'm not going to detail here. (See the instructions for Form 1040-ES.)

Good luck!
Mike Gray

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