Do SEP IRAs Have RMDs? What You Need to Know

Saving for retirement through a SEP IRA offers tax advantages, but understanding withdrawal rules is just as important as making contributions. One key rule is required minimum distributions (RMDs), which dictate when and how much must be withdrawn. Failing to follow RMD rules can lead to penalties, so it’s essential to understand how they apply.

Are RMDs Required for SEP IRAs

Yes, RMDs apply to SEP IRAs, just as they do for traditional IRAs and other tax-deferred retirement accounts. Since SEP IRAs are funded with pre-tax contributions, the IRS requires withdrawals to ensure taxes are eventually paid. These distributions must be taken annually once the account holder reaches the required age, even if they are still working.

Unlike employer-sponsored plans such as 401(k)s, SEP IRAs do not allow active employees to delay RMDs. Even if a business owner or self-employed individual continues earning income, they must begin withdrawals once they reach the required age. This rule prevents indefinite tax deferral and ensures retirement savings are taxed as ordinary income.

Age Requirements

The age at which RMDs must begin has changed due to updates in federal law. The SECURE Act of 2019 raised the RMD starting age from 70½ to 72, and the SECURE 2.0 Act of 2022 increased it further. As of 2024, individuals must start taking RMDs at age 73. For those born in 1960 or later, the starting age will rise to 75 in 2033.

The first RMD must be taken by April 1 of the year following the year the account holder reaches the required age. For example, if someone turns 73 in 2025, their first RMD must be withdrawn by April 1, 2026. Each subsequent RMD must be taken by December 31 of that year and every year after. Delaying the first distribution until April 1 means taking two RMDs in the same tax year, which could increase taxable income and push the account holder into a higher tax bracket.

Calculating the Distribution Amount

RMDs for SEP IRAs are calculated using the IRS Uniform Lifetime Table, which assigns a life expectancy factor based on the account holder’s age. The prior year-end account balance is divided by this factor to determine the annual withdrawal.

For example, if an individual is 73 in 2025 and their SEP IRA had a balance of $500,000 on December 31, 2024, the divisor from the table would be 26.5, resulting in an RMD of approximately $18,868.

If an account holder has multiple IRAs, including traditional and SEP IRAs, the total RMD must be calculated separately for each but can be withdrawn from any combination of them. This flexibility allows for tax planning, especially if one account has less liquid investments. However, RMDs for employer-sponsored plans like 401(k)s must be taken separately and cannot be combined with IRA distributions.

Distributing Your RMD

Once the RMD amount is determined, selecting an efficient withdrawal method can help manage tax liability. Distributions can be taken as a lump sum or in periodic withdrawals throughout the year. Spreading withdrawals across multiple months may help smooth out taxable income and reduce the risk of moving into a higher tax bracket. Some financial institutions offer automated monthly or quarterly payments, providing a steady cash flow while ensuring compliance.

Choosing which assets to liquidate within the SEP IRA is another consideration. Selling investments that have appreciated significantly may increase future tax burdens if the remaining portfolio becomes concentrated in lower-cost-basis assets. Some retirees prefer to sell fixed-income securities or underperforming stocks first to preserve long-term growth potential. Another option is an in-kind distribution, where securities are transferred from the SEP IRA to a taxable brokerage account instead of being sold for cash. This allows investments to remain in the market while still satisfying RMD requirements, though unrealized gains become subject to capital gains tax upon future sales.

Consequences for Not Taking an RMD

Failing to withdraw the required minimum distribution from a SEP IRA can result in tax penalties. The IRS imposes an excise tax on any amount that should have been withdrawn but was not taken by the deadline. Under the SECURE 2.0 Act, the penalty for missed RMDs was reduced from 50% to 25% of the shortfall. If corrected within the IRS’s correction window—typically by the end of the second year following the missed RMD—the penalty can be further reduced to 10%.

To avoid penalties, account holders should meet the annual deadline, which is December 31 for most years. If an RMD is missed, filing IRS Form 5329 is required to report the shortfall and request a waiver of the penalty if there was a reasonable cause for the oversight. The IRS may grant relief if the taxpayer provides a valid explanation and takes immediate corrective action. Financial institutions often offer automated RMD services to help prevent missed deadlines, which can be useful for retirees managing multiple accounts.