What Rules Apply to My SEP IRA Rollover?

An SEP IRA is different from a traditional IRA in that it’s designed specifically for small business owners and for people who are self-employed.  In fact, the SEP stands for Simplified Employee Pension and, as the name suggests, an SEP IRA is, in many ways, simpler to use in terms of management and record keeping than other types of IRAs.  If you have decided that the time is right for you to move your money out of an SEP IRA and into another qualified retirement savings plan, the process is fairly simple, but there are a few rules you’ll need to be aware of.

First, let’s state the obvious – you need a new account into which you can rollover your SEP IRA funds.  Believe it or not, trying to move funds into an account into which you are not considered to be an active participant is a common mistake.  You shouldn’t assume that just because you have gone to work for a new employer who offers an IRA, for example, that you are an active participant, as some of these accounts have waiting periods before you can participate.

If you’re concerned about moving your funds before your account is eligible, you can always check with your human resources benefits staff to see if you are past the waiting period.  Or, if your plan isn’t employer-based, you can call the trustee (sometimes called the account manager) for the new IRA and inquire as to whether or not your new IRA is ready to receive funds from your former account.

Second, you need to know that there are a few types of accounts into which you cannot rollover SEP IRAs – for example, you cannot rollover a SEP IRA into a Simple IRA or Designated Roth IRA (401k or 403b).  You can rollover an SEP IRA into a 457b account, but it must be a separate account.  In addition, you can rollover an SEP IRA into a Roth IRA, but the rollover funds may have to be counted as income, and if you convert a SEP IRA into a Roth IRA, your contributions are no longer tax deductible.

If you have any questions about these restrictions, know that the rules and regulations regarding SEP IRA rollovers are available through the Internal Revenue Service.   You can also talk with a tax or financial professional to make sure you understand the rules and make the decisions that are most advantageous to you and your retirement savings.

Generally speaking, you can transfer money tax free from one IRA to another IRA if the transfer is one that occurs between account trustees, made incident to a divorce, or handled as an indirect SEP IRA rollover.  In an indirect rollover, you receive the funds from one retirement plan and contribute them to another retirement plan on your own, without the assistance of the account trustees.

Usually the IRS gives you a narrow window of time to make this contribution, called a rollover contribution, before it considers the funds you received as income that will be taxed accordingly.  As of this writing, that period of time is 60 days.  In addition, you should be aware that rollovers must be reported to the IRS.  You will need to note the amount of funds received on your income tax return, but so long as the funds have been properly contributed to another IRA, there should be no income tax burden created.

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