Can an IRA Become an SEP?

by Herb Kirchhoff, studioD

If you have both a traditional individual retirement account (IRA), and a tax-deferred simplified employee pension (SEP) IRA set up by your employer, you can’t convert your traditional IRA into the SEP IRA. But there is a way to consolidate your traditional IRA and other tax-deferred retirement accounts into the SEP IRA.


A SEP IRA allows employers to set up a tax-deferred IRA for employees and make contributions to their IRAs without the complications of profit-sharing plans, 401ks, conventional pension plans or retirement trusts. The maximum the employer can contribute to each employee is the lesser of $49,000 or 25 percent of the employee’s salary. But the employer must make equivalent contributions to each employee. For example, If the company decided to contribute 15 percent of salary to one employee, it must do the same for all employees. The funds a company contributes to its employees' SEP IRAs are a deductible business expense. But the employees can’t deduct the employer’s contribution on their individual income tax returns.

Employees' Money

A SEP IRA is owned and controlled by the employee. The employer’s contributions belong to the employee as of the date of the contribution, even if the employee later leaves the company. SEP IRA plans established after 1997 can’t accept employee contributions through salary deductions or direct cash payments. But if you are self employed, or are the owner of the business, you can set up a SEP IRA account to receive contributions to yourself. There’s no minimum amount the employer must contribute, and no requirement to contribute every year.

Rollover Contributions

Although you can’t make direct contributions into your employer-sponsored SEP IRA, you can consolidate a traditional tax-deferred IRA and other tax-deferred retirement savings plans into your SEP IRA account through rollovers. A rollover from a personal IRA into a SEP IRA is a tax-free transaction. You can’t deduct the rollover amount from your income taxes. You can’t roll over from a Roth IRA into a SEP IRA. You also can’t roll over funds from a traditional IRA into a SEP IRA if the traditional IRA contains any after-tax contributions.

Once Per Year

You can only roll over funds from a traditional IRA into a SEP IRA once a year. You must wait 12 months from the date of your rollover before you can do another one from that IRA. You also can't rollover from either your traditional IRA or your SEP IRA into a third retirement account. But you rollover other IRAs into your SEP IRA.

About the Author

Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and home handyman. Since retiring from the news business in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.

Photo Credits

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