Can an Existing IRA Be Turned Into a SEP IRA?

Simplified employee pension individual retirement accounts, or SEP IRAs, allow employers to make contributions on behalf of their employees. They function 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. When you leave an employer and start working for yourself, you might be wondering if you can do an IRA to SEP IRA transfer.

In short, it all depends on the type of IRA account you have and if the IRS allows the rollover per the tax codes. There are many cases where a rollover IRA to a SEP IRA is allowed and smart for investors.

Tax-Deferred IRAs

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.

Tax Reporting Requirements

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.

Read More:How to Report IRA Rollovers