- 1). Wait until you receive your form 1099-R from your financial institution that documents your SEP withdrawal before you file your taxes.
- 2). Determine whether you are taking a qualified distribution or not. Only distributions taken after you turn age 59 1/2 are considered qualified distributions. If your distribution is qualified, you only have to complete Step 3 because you will not owe any penalties on your withdrawal. If you are not 59 1/2, you will have to complete all of the remaining steps.
- 3). Report the taxable amount if your SEP withdrawal on your form 1040 or form 1040A tax return as taxable income. The taxable amount is found in box 2a of your Form 1099-R form.
- 4). Complete form 5329 to determine how much, if any, you owe in penalties on your non-qualified SEP withdrawal. If you have an exemption, report the code for the exemption next to line 2 and the amount of the exemption on line 2. The codes can be found in the IRS instructions for form 5329. For example, if your distribution went toward higher education expenses, you write "08" next to line 2. Any amount exceeding the exemption, or the entire amount if you have no exemption, is subject to a 10 percent penalty.
- 5). Report the amount of the penalty on line 54 of your form 1040 tax return. If you owe a penalty, you must use form 1040; you cannot use form 1040A or form 1040EZ. This penalty is in addition to any income taxes you owe on the withdrawal.
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