What is the penalty for taking money out of a SAR-SEP?

September 11, 2002

From:  John
Date:  Tue, 6 Aug 2002

What is the penalty for taking money out of a SAR-SEP?

Answer

Date:  30 Aug 2002

Hello John,

A SAR-SEP is a Salary-Reduction Simplified Employee Pension. They were generally repealed when SIMPLE plans were enacted, so new SAR-SEPs may not be established after December 31, 1996.

The retirement account in which the funds are held is a type of IRA, so early withdrawals are treated like an early distribution from an IRA. The federal penalty is 10%.

There are exceptions for distributions to certain unemployed individuals up to the amount paid for qualifying medical insurance premiums, certain qualified higher education expenses, and certain first-time homebuyer expenses. You should see a tax advisor if you think you might qualify for an exception.

The early distribution and related penalty are reported on Federal Form 5329.

Good luck!
Mike Gray

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