The Simplified Employee Pension or SEP is a retirement plan meant to encourage savings for a secure and relaxed life after retirement. The SEP though different in structure, serves the same purpose as the Individual Retirement Account (IRA). The SEP is designed for persons who are self-employed, sole proprietors, independent contractors, partnership or owner-employees of an incorporated business or trade. This plan can be applicable to any business. SEP is easy to provide, plan and execute without having to incur a lot of expense and is does not involve any complex administration work like many of the qualified retirement plans. SEP, in fact, can be established only in case of the employer having no other qualified retirement plan in force at the time.
The contributions from the employer to the Simplified Employee Pension or SEP are made at the employer’s discretion. These contributions should amount to $30,000 or 15% whichever is less and are must be deposited in the IRA account established in each and every eligible employee’s name. This is the reason why the arrangement is known as a SEP – IRA. The employee now has the right to use the funds as these contributions are now owned by him or her. These funds can now be transferred or withdrawn by the employee at any time at his discretion. However as the SEP accounts are IRAs they are subject to all existing IRA rules and regulations governing the withdrawal, transfer and taxation.
In the traditional IRAs money can be withdrawn at any time but the withdrawals, either part or whole, will be taxed at the prevailing income tax rates. These withdrawals may also be penalized. If the withdrawals are made before attaining the age of 59 1/2 years they may attract an excise duty of 10% in addition to the income tax. However, there are exceptions where the 10% penalty does not apply to IRA withdrawals. Those are: A) the withdrawals made in case of the IRA owners death. B) Due to the owners disability. C) Medical expenses that are not reimbursed and which exceed 7 1/2% of adjusted gross income (AGI). D) “Substantially equal periodic payments” that are made over the life expectancy of the owner. E) Payments made as costs of first time home purchase. These of course, are subject to a limit of $10,000. F) Payments made as medical insurance premiums. This exception is only applicable to persons who have received unemployment compensations for over 12 weeks. G) Payments made as back taxes in case of a levy placed against the IRA by the Internal Revenue Service and H) Qualified expenses incurred for higher education for the IRA owner or the eligible members of the family.
It is compulsory in case of traditional IRAs, for the distributions to begin before the owner reaches the age of 70 1/2. In case the minimum required distributions are not made before this period, the balance undistributed amount will attract an excise tax of 50%. This however is not applicable to Roth (IRAs) as this IRA plan does not have any mandatory distribution requirement.
