We have a comprehensive yet concise list of SEP IRA rules, as you read on to know what are the conditions that govern one’s account and all the necessary steps you must take towards getting there- run a SEP IRA.
Plan Establishment Rules & Eligibility
Any employee above 21 years who has earned at-least $500 in a tax year and has worked for 3 out of the 5 previous years is eligible. In some cases this criteria is more relaxed. In any case, tax deduction takes place on all contributions to a SEP IRA plan within the tax year.
SEP IRA Rules and Benefits on Distribution
The rules for a Traditional IRA plan and the SEP IRA plan are no different. You probably already know about the ‘distribution age’, which is the age before which you cannot take out distribution—which in case you do, you will be penalized. 59 and half years is the eligible distribution age, and a penalty of 10% is imposed on distributions that are carried out before this. There are medical expense benefits when you can’t reimburse expenses that go over 7.5% of your Adjusted Gross Income (AGI).
Purchase of Home
The regulations laid down seem to be a bit soft on people who are buying a home for the first time, in that there are no penalties imposed upon the funds while one takes out the SEP IRA distributions. However, there are some restraints—you must spend the money before 120 days from the date of your receipt of SEP IRA distribution, and you must spend it on paying for the costs of home acquisition.
You must note that you can’t spend beyond an amount of $10,000, the whole of your SEP IRA cannot be used up on your home, even if it is your first home. For married couples, this amount goes up to $20,000. Just for a sense of completion, the idea behind removing any penalties is to encourage home ownership, by the Government. A distribution is automatically triggered if you owe IRS some money.—make sure you have no such liabilities.
Establishing SEP IRA:
- The first step an employer takes is get an agreement signed by all employees to provide a SEP IRA
- Make sure everybody receives this information and is aware of it
- Make sure that every employee gets an account.
The first step, clearly, states that an employer after signing an agreement would provide to each employee who is eligible a SEP IRA option. The due date for this letter must be before your tax return date, in case you extend it, then the due date is this extended date.
Get the form from financial institutions, use Google to gain more information and read about a template of an SEP IRA form. Type in ‘IRS model Form 5305-SEP’ and you can have a lot of information at your call. Ensure that you are aware of any exceptions that might be there, all these details are up and available on the IRS website. The next step is to communicate this to all employees and give them a detailed description.
In the end, it is upon YOU to make sure that every employee gets an account established.
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