This 10 percent penalty is in addition to the ordinary income tax you would normally pay if you withdrew from your SEP-IRA after you passed the aforementioned age threshold.
Here's a general example: If the plan is worth $10,000, and $2,000 is taxable, you would be subject to ordinary income tax (it depends on your tax bracket, but let's say 35 percent) of the $2,000. So that's about $700. However, you'd also be taxed an additional IRS penalty of 10 percent of that same $2,000. That's another $200, bringing your total taxes to $900.
But be sure to review the exceptions to the 10 percent penalty (as detailed below) since your specific situation and use for the money may exempt you from being subject to the penalty.
No Penalty Exceptions: Simplified Employee Pension (SEP-IRA)
The exceptions to the 10 percent IRS penalty rule are if the withdrawal was:
1. Death/Disability - Upon death or having developed a disability.
2. Payment Plan - Part of "substantially equal payments" over your lifetime.
3. Medical Expenses - For payment of non-reimbursed medical expenses exceeding 7.5 percent of your adjusted gross income.
4. Medical Insurance - For payment of your medical insurance or your spouse and dependents medical insurance. The withdrawal must occur during these scenarios:
a) If they lost their job
b) Have received unemployment for 12 weeks straight
c) Receives the unemployment on the following year
d) Receives distributions no later than 60 days after re-employment.
5. Higher Education Expenses - For qualified higher education expenses.
6. Home Purchase - For the purchase, building or renovation of a first home for the first $10,000.
Bottom line, if you are not exempt from the 10 percent penalty, you may want to rethink dipping into your SEP-IRA. For more information, feel free to read a recent article I wrote on ways to avoid liquidating your IRA.