Setting up an SEP IRA rollover is relatively simple, as the SEP IRA rollover rules are similar to those that govern traditional IRA rollovers. You’ll first need to establish an IRA account with the provider of your choice. The new account provider will then provide you with the necessary paperwork to move your old SEP IRA funds into the new IRA. As with a traditional IRA rollover, be sure to choose the direct transfer option, as this will prevent you from incurring any unnecessary taxes or penalties that will diminish the value of your retirement accounts. Your account provider can assist you with any additional questions you have about your SEP IRA rollover transfer.
An SEP IRA, also known as a Simplified Employee Pension Individual Retirement Account, is a specific type of IRA (Individual Retirement Account). In general, SEP IRAs are used by businesses of all sizes in order to provide retirement benefits for both the business owners and any or all of their employees. Significantly, there are no substantial costs for administering these plans when this tool is used by the self-employed that have no employees. However, if the business owner does have employees, all employees have to receive the same benefits under this type of plan. Since SEP accounts are treated just like a normal IRA, funds can be invested the same way.
All contributions to an SEP IRA are regarded as part of a profit-sharing plan. In the case of employees, the employer has the option of contributing up to 25 percent of the employee’s wages to the account. For example, if an employee at the company earns $100,000 in wages, the employer could contribute as much as to $25,000 to the account. The total contribution to an SEP-IRA cannot exceed the lesser of 25 percent of income (20 percent for self-employed individuals before a self-employed tax deduction) or $49,000 (for fiscal year 2009).
In addition to these rules, there are special considerations for the self employed. Specifically, the contribution limit for a self-employed person is more complicated to determine than the limit for an average employee. Disregarding limits for a moment, the contribution maximum typically works out to be approximately 18.6 percent of net profit. This computation, as well as any special considerations for this case, can be found in IRS Pub 560, Section 5.
If you are an employer who’s invested retirement funds in SEP IRA or an employee who received employer contributions through this retirement vehicle, it’s easy to see what the benefits of this account structure are. As an employer, the SEP IRA provides you with an easy way to establish retirement savings plans for you and your employees without having to go through the hassle of setting up a formal 401k or 403b plan. And as an employee, you’ll find that the larger SEP IRA contribution limits (as compared to traditional IRAs) enable your retirement savings to grow at a faster rate than they would by investing on your own.
However, these benefits don’t mean that you’ll always want to keep your money in the employer-selected SEP IRA. If you leave your job, you may want to consider an SEP IRA rollover to a privately held IRA account. A traditional IRA, for example, may offer you a wider range of investment options than were previously available in your employer’s SEP IRA. Access to these new options could make a significant difference in the growth of your portfolio. In addition, if your employer’s SEP IRA account is managed by a company with a less-than-stellar reputation, you may want to use this opportunity to move your retirement funds to a company you trust.