As you may already be aware, SEP stands for Simplified Employee Pension Plan, and an SEP IRA is a type of qualified plan designed especially for those who are self-employed or for employers who own small businesses. As with any qualified plan, an SEP IRA enables your retirement investment to grow over time, while deferring taxes until the funds are withdrawn. But does that mean you should transfer your existing retirement funds into an SEP IRA account?
There are several things you should consider before you move any money from an existing qualified retirement account to another. The first is to consider how well your existing qualified retirement plan is performing. If you are pleased with your investments’ performance to date, there may be little reason to move your money. If, however, the new SEP IRA plan offers you the potential for increased growth on your money, then a transfer is probably a good idea.
Next, consider how much money will be contributed to the SEP IRA on your behalf. Under current SEP IRA contribution rules, you may be able to contribute as much as $49,000, or up to 25 percent of your compensation each year. In nearly all cases, these limits dramatically exceed the limitations on traditional and Roth IRAs, increasing your ability to save for your retirement. However, if for some reason you want to make contributions in excess of this amount, you may want to talk to a financial adviser about the best way to manage your contributions.
On the other hand, if you’re leaving a job for self-employment, you should know that you can continue to participate in a qualified plan with your employer while establishing a separate SEP as a self-employed individual, or even as a small business owner. There are no prohibitions against participating in multiple SEP IRAs at any time. If you’re going to establish a SEP IRA as a business owner, however, you should know that you’ll be required to make equal contributions on behalf of your employees, based on a percentage of their compensation.
You should also consider the SEP IRA and its provider. How stable is the provider? What is their performance record like? What kinds of returns might you be able to anticipate? What is their customer service like? While past performance can’t guarantee future performance, it at least provides a basis for comparison across potential providers. Don’t discount the importance of customer service when evaluating providers either – if you ever have trouble with your SEP IRA rollover account, you’ll rely on the provider’s customer service to protect your retirement savings from unnecessary taxes or penalties.
At the end of the day, there’s no one answer for everyone when it comes to performing a rollover to SEP IRA. You must consider your existing investments, future needs and the potential offered by your various options. In complicated situations such as these, a few hours spent with a financial planner or adviser can provide you with answers tailored for your individual needs and situation.