Can a SEP IRA Rollover Into an IRA?

by Wilhelm Schnotz

A simplified employee pension individual retirement arrangement (SEP IRA) allows small businesses to offer retirement plans to owners and employees that are similar in nature to traditional IRAs, though with fewer administrative costs. Workers who move jobs or simply want to change retirement strategies after contributing to a SEP IRA and wish to roll funds into another retirement account, such as a traditional IRA, must adhere to rollover laws to avoid penalties.

SEP IRA Rollover Options

As the Internal Revenue Service (IRS) established SEP IRAs as a similar retirement arrangement to traditional IRAs, rolling funds between the two is allowed under all circumstances. Likewise, investors may perform a rollover to move traditional IRA funds to SEP IRA. In fact, owners of SEP IRAs have a wide range of flexibility when choosing to roll over their funds, as the IRS allows rollovers from SEPs to 457b funds, qualified plans such as 401ks and money purchase accounts, and 403b plans. Rollovers to Roth IRAs are also allowed, though they must include in income.

Rollover Methods

The IRS allows investors to move funds between SEP and traditional IRAs without the direct help of financial institutions, though they must adhere to guidelines to avoid inadvertently incurring a tax penalty. Investors may close an SEP and receive the funds and move them into a traditional IRA through a bank transfer or other payment process. They must complete the rollover in 60 days. If the investor holds onto funds distributed from an SEP longer than 60 days, he incurs the 10-percent early distribution excise tax, and is taxed on the distribution as if were normal income, paying taxes at his marginal tax rate. Alternately, an investor may have his financial institutions directly transfer funds from the SEP IRA to traditional IRA, and never receive the funds, cutting out the possibility of incurring a distribution penalty.

SEP IRA Distribution Rules

Rules for receiving distributions from SEP IRAs are exactly the same as receiving them from traditional IRAs. An investor must be 59 1/2 to receive a distribution without incurring a 10 percent excise tax penalty. Because investors make contributions to SEP and traditional IRAs on a pretax basis, all distributions, regardless of when taken, are taxed as regular income. Early hardship withdrawals for medical care, educational expenses and to pay health insurance premiums are allowed in qualifying circumstances. Moving money from an SEP IRA to a traditional IRA doesn't provide any advantages for distribution.

Rules on Contributions

Small companies that offer their workers SEP IRA plans are bound to administer them according to IRS regulations. The IRS eligibility requirements are that the employee be a minimum of age 21 and has worked for the company at least three of the previous five years. Contributions must be made using the same percentage of an employee's income for all eligible members, and contributions into the plan immediately become the property of the employee and may be rolled into a traditional IRA immediately.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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