A simplified employee pension individual retirement account, or SEP IRA, allows employers to make contributions on their employees behalves and functions like a traditional IRA. If you are self-employed, you can start an SEP IRA on your own because you are both the employer and employee. If your have an SEP IRA plan at work, you may be able to roll the money from another IRA into the plan.
Tax-deferred IRAs, including traditional IRAs and SIMPLE IRAs can be rolled into a SEP IRA, as long as the SEP IRA plan accepts such contributions. The IRS permits SEP IRAs to accept such rollovers, but each SEP IRA plan can choose whether or not to accept such conversions. When you make the conversion, you do not incur any extra tax liability because you are moving the money from one tax-deferred IRA to another tax-deferred IRA.
SIMPLE IRA Time Requirement
A savings incentive match plan for employees, or SIMPLE IRA, does permit you to convert the plan money into a SEP IRA. However, the SIMPLE IRA must have been in existence for at least two years before you move the money from it to an SEP IRA. If you try to roll over money prior to the two-year anniversary of your SIMPLE IRA, the IRS considers the rollover money to be an early distribution and the contribution to the SEP IRA to be an excess contribution.
No Roth Conversions
The IRS does not permit any SEP IRAs to be treated as Roth accounts, which are IRAs funded with after-tax contributions. Accordingly, you cannot convert your existing Roth IRA into a Roth SEP IRA. In addition, the IRS does not let you convert from any after-tax account to a tax-deferred account, such as an SEP IRA. Doing so would require the IRS to allow you to claim a deduction for the amount of the conversion because you would have to pay taxes on the withdrawals from the SEP IRA, which you do not have to do with a Roth IRA.
If you move money from another IRA to a SEP IRA, you may have to report it on your income taxes if you use a rollover rather than a transfer. In a transfer, the money goes straight from your old IRA into your SEP IRA so you never handle the money. With a rollover, you take a distribution from your old IRA and then make a deposit into your SEP IRA. Though a rollover does not cause you to owe more taxes, you must record it on your income taxes because you can only perform one rollover per 12-month period.
- Internal Revenue Service: Publication 590
- Internal Revenue Service: Retirement Plans FAQs regarding SEPs
- Internal Revenue Service: Rollover Chart
- Internal Revenue Service. "Retirement Topics - Termination of Employment." Accessed Jan. 29, 2020.
- Internal Revenue Service. "SIMPLE IRA Withdrawal and Transfer Rules." Accessed Jan. 29, 2020.
- Internal Revenue Service. "SIMPLE IRA Plan." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Choosing a Retirement Plan: SIMPLE IRA Plan." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Retirement Topics - SIMPLE IRA Contribution Limits." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Publication 560 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)." Accessed Jan. 29, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."