The Internal Revenue Service allows an employer contributing to a simplified employee pension individual retirement account (SEP IRA) to deduct its contributions on the company’s federal tax return. Because the IRS does not tax money deposited in a SEP-IRA in the year an employer makes a contribution, the IRS taxes the money as ordinary income when an account owner makes a withdraw. The IRS requires a person to begin receiving required minimum distributions (RMDs) from a SEP-IRA at age 70 1/2.
You must take your first RMD from a SEP-IRA by April 1 of the year following the year in which you turn 70 1/2. If you receive your first RMD on April 1 of a given year, you must receive your next RMD by December 31 of that same year. December 31 is the deadline by which the taxpayer must receive RMDs from a SEP-IRA in subsequent years as well.
To determine the amount of an RMDs you have to take, use Table III of the Uniform Lifetime Table included in IRS Publication 590 as Schedule C . To calculate the amount of a taxpayer’s RMD for a given year, divide the balance of your SEP-IRA account on December 31 of the previous year by your life expectancy.
If you are 73 years old, Table III shows your distribution period equals 24.7 years. If your SEP-IRA had a balance of $500,000 on December 31 of the preceding year, your RMD for the current year equals $500,000 divided by 24.7, or $20,243. If, on the other hand, you are 90 years old, the IRS estimates your life expectancy to be 11.4 years. In this case, your RMD then equals $500,000 divided by 11.4, or $43,860.
Even if you begin taking withdrawals from your SEP-IRA before the IRS requires you to, you must still withdraw at least the required minimum amounts in the years following the year you turn70 1/2. If you withdraw more from your SEP-IRA than what the IRS requires you to, you cannot carry the excess forward to reduce the amount of your RMD in a future year. If you fail to take an RMD, the IRS may assess a 50 percent excise tax to the amount not distributed from your account.
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