The IRS has posted frequently asked questions on its website on withdrawals from individual retirement accounts (IRAs), simplified employee pension (SEP) plan, and a Savings Incentive Match Plan for Employees (SIMPLE).
SEPs and SIMPLEs are viewed as simpler types of retirement plans for employers to maintain. For a SEP-IRA, only the employer can make contributions. The employee is 100 percent vested in the contributions and can withdraw funds from their account at any time. In a SIMPLE IRA, the employer Is required to make a contribution each year, either a 3% matching contribution or a 2% contribution for everyone. Only small employers with less than 100 employees are allowed to use a Simple. Employees are also 100 percent vested in their account. The contribution limitations are smaller than a 401(k) plan. But neither the SEP or Simple plans have any filing requirements with the IRS as do other qualified plans, such as a 401(k) plan.
In-service distributions and penalties
Participants can withdraw funds from an IRA, SEP-IRA, or SIMPLE-IRA at any time, whether working or retired. There is no hardship requirement. However, the distribution will be subject to a 10% early withdrawal penalty if the participant is under the age of 59 ½, unless an exception applies. Withdrawals from a SIMPLE-IRA are subject to a 25% penalty in the first two years of participation.
There are exceptions from the 10% and 25% penalties which include distributions after death or permanent disability of the owner, distributions to a former spouse under a qualified domestic relations order (QDRO), higher education expenses, permissive withdrawals from a SIMPLE IRA with automatic enrollment features, first-time homebuyers, series of substantial equal payments and unreimbursed medical expenses.
Required minimum distributions
IRA owners are required to take RMDs in the year they turn age 70 ½. The amount of the RMD is calculated by dividing the account balance at the end of the previous year by the IRA owner’s life expectancy. The RMD requirement applies even if the participant is still working, which is not the case in a qualified plan other than a 5% owner. Roth IRAs are not subject to the RMD requirements.
Qualified charitable distributions
A QCD is a RMD that is paid directly to a charity. . The distribution cannot be paid to a donor advised fund or a private foundation. QCDs cannot be made from SEPs on SIMPLE IRAs. The annual amount that can be excluded from income is $100,000. The law allowing QCDs was extended by Congress in December of 2014, but only for the year 2014.
There is talk that Congress will try to get extender legislation done in early 2015, so possibly the QCD will also be available in 2015. The advantage of the QCD is that the distribution is not included in adjusted gross income. The lower income will help increase certain deductions for those deductions that are reduced by a percentage of adjusted gross income, such as medical expenses and miscellaneous itemized deductions.
Single distribution treatment
The IRS also posted material on the new single distribution rule for retirement plans. Under their guidance, participants who roll over a retirement plan distribution to multiple destinations (such as a traditional and a Roth IRA) can treat the rollovers as a single distribution. As a result, the IRS will allow the participant to allocate pre- and post-tax amounts as they choose. Thus, all pre-tax amounts can be allocated to the traditional IRA and will not be taxable.
Please contact us if you have any questions about IRAs 417-881-0145.