Do You Have to Take RMD From a SEP IRA If Still Working?
Your employment status affects Required Minimum Distributions differently depending on the account. See how the rules for a SEP IRA vary from other plans.
A Required Minimum Distribution (RMD) is a mandatory annual withdrawal from certain tax-deferred retirement accounts, which the government requires once you reach a specific age. A Simplified Employee Pension (SEP) IRA is a type of traditional IRA for self-employed individuals and small-business owners, allowing for higher contribution limits than a standard IRA. Many individuals who continue to work past the traditional retirement age wonder if their employment status allows them to delay these mandatory withdrawals from their SEP IRA.
Standard RMD Rules for SEP IRAs
The rules for Required Minimum Distributions from SEP IRAs do not depend on your current work situation. Once you reach the designated RMD age—73 for individuals born between 1951 and 1959, and 75 for those born in 1960 or later—you must begin taking annual withdrawals from all your traditional IRAs, including SEP, SIMPLE, and rollover accounts. Being employed does not grant an exception, as the “still working” exception does not apply to any type of IRA.
The RMD amount for a given year is calculated by taking the account’s fair market value as of December 31 of the previous year and dividing it by a life expectancy factor found in the IRS’s Uniform Lifetime Table. If you hold multiple IRAs, you must calculate the RMD for each account separately. You can, however, aggregate the total RMD amount from all your IRAs and withdraw the entire sum from just one of those accounts, providing some flexibility in managing your distributions.
The “Still Working” Exception and Employer Plans
The confusion about delaying RMDs stems from a rule for employer-sponsored retirement plans, such as 401(k)s. If you are still employed by the company that sponsors your 401(k) plan and are not a significant owner of that business, you may delay taking RMDs from that specific plan until you retire. This exception only applies to the account sponsored by your current employer.
This provision does not extend to retirement plans held with former employers. For example, an individual who is 74 years old and still working for Company A can delay RMDs from their Company A 401(k). That same individual must still take the required annual distribution from their SEP IRA and any 401(k) plans from previous jobs.
The 5% Owner Rule
The “5% owner rule” negates the “still working” exception for employer-sponsored plans if the individual owns more than 5% of the business that sponsors the plan. A 5% owner is defined as someone who owns more than 5% of the company’s stock or more than 5% of the capital or profits interest in the business.
This means that for a 401(k) plan, a business owner cannot delay RMDs past the mandatory age. Because individuals with SEP IRAs are frequently self-employed or small business owners, they are almost always considered more than 5% owners. They are required to take RMDs from all their retirement accounts, including their SEP IRA and any 401(k) they established for their business, once they reach the mandatory age.
Consequences of a Missed RMD
Failing to take a required distribution by the December 31 deadline results in a penalty. The penalty is a 25% excise tax on the RMD amount that was not withdrawn. This can be reduced to 10% if the shortfall is corrected within a “correction window,” which is generally within two years of the missed distribution.
To correct a missed RMD, you must withdraw the required amount as soon as you realize the error and file IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. This form is used to report the shortfall and pay the tax. You can request a waiver of the penalty by attaching a letter to Form 5329 explaining that the failure was due to a reasonable error.