SEP IRA Rules

Simplified Employee Pension (SEP) IRA is the way to go if you are a small employer (typically less than 10 employees and many times just on employee) looking for a retirement plan that is easy to install and administer. Most financial institutions will have the plan documents on file and it’s as easy as opening any investment or bank account. For those of you that do not know how easy it is, you just have to fill out a couple forms and you’re good to go. These are retirement plans that are ideal for small business owners and self employed individuals.

Rules for SEP IRAs

Since the funding vessel of SEP IRA is Traditional IRA, distribution rules of Traditional IRA applies with SEP. Distributions after reaching the age of 59 ½ will be without 10% early withdrawal penalty because it is a qualified distribution already.

Contributions of eligible employees will have a limit of $49,000. It will be made exclusively by their employers and generally it is tax deductible.

Any employer can open a SEP IRA account. That includes sole proprietors, partnerships, corporation and even non-profit organizations.

Roth IRA Rules

Anyone working for a living is allowed to administer a Roth IRA account regardless of age. The only provision that hinders some individuals to open this type of IRA is income limits. Roth IRA income limits are set for the following specific filers:

  • Single filers, head of households, and married couples filing separately but not living with each other will not be allowed to contribute to a Roth if their modified adjusted gross income will not meet the limits that are $107,000-$122,000.
  • For joint filers it will be $169,000-$179,000.
  • With married couples filing separately and living with each other, their MAGI should not exceed $10,000 to be allowed a full contribution to Roth.

Roth IRA withdrawal rules will be simple. Don’t take money out of your IRA before the maturity age of the account which is 5 tax years after administration. Your first withdrawal should also take place upon reaching the age of 59.5. If in case you are forced to distribute money before these terms, let’s say maybe because of financial constraints, a 10% early withdrawal penalty will be imposed.

The 2011 IRA contribution limits of Roth will be the same as that of the 2009 and 2010. Account holders can contribute up to $5,000 with a catch up limit of $1,000 for those who are 50 years old and above.

Inheriting an IRA

Inherited IRA rules will somehow be tricky but like any other IRA’s it is a very good investment. With the right attitude towards inherited IRA’s will give you great returns.

For account holders it is very important to make sure in filling out the beneficiary form because failure to do so will highly likely hinder your beneficiaries to stretch the inherited IRA with their lifespan. Beneficiaries after inheriting an IRA should take into account how it would suit his estate plans.

Other assets could not be commingled with inherited IRA’s. A benficiary inheriting several IRA’s from one person can combine it all providing they are of the same type. For example an inherited traditional IRA cannot be combined with an inherited Roth IRA. Inherited IRA’s from different persons cannot also be combined.

10% penalty for early withdrawals with inherited IRA’s are not in effect. Regardless of age the beneficiary can readily withdraw money from the IRA’s that they inherit. If you are familiar with the 60-day rollover rules for IRA, it does not apply in inherited ones. All borrowed amount will be and shall be subjected to tax.

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The information provided on this website does not constitute professional financial advice. We do our best to maintain current & accurate information, but some information may have changed since it was published. Please consult your tax or legal advisor(s) for questions & advice concerning your personal financial situation.
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