Early withdraw sep ira tax question

Question

When you do an early withdraw from a sep ira, When do you pay the taxes and penelties? Is it when I do my taxes, or is it immediately like a paycheck?

Answer 1

Both, actually.

Distributions from an IRA are subject to Federal income tax withholding at 20%.  You figure the actual tax bill when you file your tax return and get credit for the taxes that were withheld.  

With the 10% penalty for early withdrawal included the tax bill is often MORE than the 20% that was withheld.  If you're in a 15% bracket, it will be shy by 5%.  If you're in a 25% bracket, it will fall short by 15%.  Many folks are shocked at tax time to learn that they will be writing a pretty substantial check instead of getting their usual refund.  For this reason it's necessary to run the numbers in advance and make an estimated payment using Form 1040-ES to cover the added tax liability and avoid penalties for underpayment of tax.

Taxes are due when the income is earned, NOT on April 15th as most folks think.  This is why we have taxes withheld from our wages or make estimated payments if we're self-employed.  Unfortunately the 20% withholding on retirement distributions isn't always sufficient to cover the tax bill, particularly when the 10% penalty for early withdrawal is added on.

Answer 2

most likely at the time of withdrawal.  and if they dont withhold, then yes, you pay when you file your return.