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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29571
Experience:  Taxes, Immigration, Labor Relations
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How do I process hardship withdrawal from a sepp IRA

Resolved Question:

How do I process hardship withdrawal from a sepp IRA
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.
Hi and welcome to Just Answer!
There are no prohibitions on distributions from IRA-based plans. A participant can take distributions at any time. However, in addition to the distribution being taxable, it may be subject to a 10% additional tax if the participant has not reached age 59 1/2.
Unlike a 401k, you are not prohibited from taking a distribution from either a SEP-IRA or an IRA at any time. As in-service distributions are allowed, so are "hardship" distributions, subject to the same conditions.
You may simply request the distribution by contacting the administrator of your SEP-IRA.
Let me know if you need any help.
Lev and 2 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
I am a 52 years business owner of an LLC company , I need to use my sepp ira funds 500K to buy a second home since I am unable to secure mortgage due to my income reduction over the past 3/4 years , how can I use the Sepp Ira funds towards the purchase and deffer taxes and avoid early withdrawal IRS imposse penalies
Expert:  Lev replied 5 years ago.
You may not use funds in your SEP-IRA account unless you taking the distribution.

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions:

  • Borrowing money from it.

  • Selling property to it.

  • Receiving unreasonable compensation for managing it.

  • Using it as security for a loan.

  • Buying property for personal use (present or future) with IRA funds.

Yes - funds are yours and you may use these funds as you need or want. Unfortunately using funds to purchase a second home would require to take distribution taxes and penalties may not be deferred.
Sorry if you expected a different answer.
Customer: replied 5 years ago.
would be any different if it is purely purchased as an investement rental property ?
Customer: replied 5 years ago.
What are the early withdrawal tax penalties ?
Expert:  Lev replied 5 years ago.
That is possible.
You may structure your IRA to purchase rental properties - so called self-directed IRA.
In this case - there will not be any distribution.
You may find more information here -

Please be aware that not all administrators allows self-directed IRA accounts and there might be higher management fees.

What are the early withdrawal tax penalties ?
Early withdrawal tax penalty is 10%.
Customer: replied 5 years ago.
If am doing a rollover from a sepp ira to a self directed ira , how much time is allowed for the rollover
Expert:  Lev replied 5 years ago.
There is no specific time frame for rollover.
The simplest way is to do direct rollover from one administrator to another (or from one account to another within the same administrator).
If you take a distribution - you will have 60 days to put into another account to be considered rollover - but if any taxes are withheld on distribution - you will need to make up the difference.
Customer: replied 5 years ago.
What is the amount of tax withheld by the administrator at distribution ? And is it mandatory by all administrators ? My current Sepp IRA has 500K and is administered by Invetement brokerage firm , Meryl Lynch ! I
Expert:  Lev replied 5 years ago.
Normally withholding upon distribution is 20%.
Yes withholding is mandatory.
If you take $100,000 distribution - you may expect $20,000 withholding.
If you contribute $80,000 into another IRA account - $20,000 will be treated as taxable distribution - to avoid tax liability you need to add $20,000 withing 60 days.

To avoid these complication - it is preferable to have a direct rollover.
Customer: replied 5 years ago.
Can I set up a self directed IRA in my personal bank or my current investement bank and be named as the administrator , manager , than make a direct rollover into that IRA , than use the funds to purchase the rental property with those funds ?
Expert:  Lev replied 5 years ago.
You can setup a self-directed IRA with any bank or financial company - there is no limitations from the IRS..
However - not all administrators offer self-directed IRA accounts - I suggest to contact the financial adviser before initiating the transfer if they allow self-directed IRA options.
Lev and 2 other Tax Specialists are ready to help you