SEP and SIMPLE IRAs Are Not Savings Accounts

Wednesday, March 18, 2015

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRA4EdSlott

Did you set up a SEP IRA or SIMPLE IRA thinking it was a savings account for your retirement? While it is a way to save for retirement, it is NOT a savings account.

The rules for a savings account are relatively simple. Put money in … it earns interest that you will pay income tax on; take the money out … no taxes and generally no penalties.

The rules for SEP and SIMPLE IRAs are far more complicated. There are rules for how much you can put in, when it must go in, what you can invest in, penalties for early withdrawals, rules for taking the money out, and rules for when you must take money out.

Many small business owners operate their SEP or SIMPLE plans in complete ignorance of the many rules that govern these accounts. They treat the account as a savings account.

To help keep business owners on track, IRS has some online tools available. They now have two new publications, which are one page checklists for your SEP or SIMPLE IRA. On the IRS website, www.irs.gov, in the Forms and Publications tool, you can find Publication 4284, SIMPLE IRA Plan Checklist and Publication 4285, SEP Checklist. Best of all, they are free!

So, do your plan checkup soon and make sure you are operating your plan correctly. If you are not, you risk having the plan disqualified and losing all of your tax deductions for funds put into the plan, plus interest and any applicable penalties. And perhaps even worse, employees might end up with taxable distributions.  

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