Can I Convert a SEP IRA to a 401(k) in California?

by Jack Ori

Self-employed individuals in California can set up a SEP IRA -- a special kind of retirement plan for people who work for themselves and their employees. This plan, like other retirement plans, allows individuals to put money aside for their retirement. You can't take money out of your SEP IRA before you reach the age of 59 1/2, but if you need to take a loan, you can convert your IRS to a 401(k).


SEP IRAs provide more investment options for you; thus, you may be able to build a bigger nest egg if you contribute to a SEP IRA than if you contribute to an individual 401(k). However, you may be able to contribute more to an individual 401(k) than you can to a SEP IRA and you get a larger tax deduction for 401(k) contributions. In addition, you can't borrow from funds in your SEP IRA.


Converting your SEP IRA to a 401(k) is legal in all 50 states. You don't usually pay tax penalties for rolling over your IRA to a 401(k). Contact your 401(k) plan provider to get the appropriate paperwork to convert your SEP IRA to a 401(k). Rolling over your SEP IRA to a 401(k) is a simple matter; you don't have to do anything other than submit the paperwork to transfer money from one to the other.

Required Notices

If you decide to convert your SEP IRA into a 401(k), you must notify any employees that you are covering under your SEP plan that you are terminating the plan. You don't have to notify the IRS or the California Franchise Tax Board of your intentions to terminate your SEP plan. Once you convert your SEP plan to a 401(k) plan, you can offer your employees the ability to contribute to the 401(k) plan as well.


If you are self-employed, a SEP IRA is simpler to set up than an individual 401(k). You can contribute up to $49,000 or 25 percent of your revenue, whichever is less, each year to your SEP plan. Rolling over to a 401(k) is as simple as setting up the plan, so if you discover you need to take a loan against your retirement funds you may want to consider doing so.

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