There are very simple steps involved in setting up an SEP IRA rollover. It’s best to take them in stages, making sure that each one SEP rollover step will be completed before moving on to the next one. By following this simple SEP IRA rollover process, you’ll not only successfully complete the rollover, but will also maintain the desired tax deferred status of your retirement investments.
While it seems simplistic, one of the most common mistakes that investors make is that they request a rollover before the target IRA (the account that’s receiving the funds from your SEP IRA rollover) is ready to accept the money from the original account. For example, if your new IRA is part of your new employer’s benefits package, be aware that it isn’t automatically ready to receive funds from the moment you start working. There may be a delay of a few weeks – or even a few pay periods, depending on your employer.
Fortunately, the first thing you’ll need to do to set up your SEP IRA rollover is to call the manager of the new target IRA. In addition to initiating the transfer, they’ll also be able to tell you if the account is ready to receive the funds or, if not, when it will be ready for your rollover funds.
While you have the manager on the phone, ask questions about the type of account you’ve opened. There are rules as to what types of IRAs can receive your SEP IRA rollover that you’ll need to be aware of. Generally, there’s little problem transferring funds between the same kind of IRAs – going from one SEP IRA to another SEP IRA should be no problem. The manager of the new fund will be able to advise you about any other exceptions that may prevent you from rolling money from your SEP IRA accounts to the new account.
Now, here comes the important part. Once you know that the target IRA is active and ready to receive the rollover, and that there are no restrictions for rolling funds out of your SEP IRA, then you need to request a “direct rollover.” Be sure to use those exact terms. This will ensure that the funds will move directly from one account to another.
In this type of transfer, the money will never come into your hands. If the money does come to you, the entire situation will change. When the account holder receives the balance of the SEP IRA accounts as a check, it’s classified differently than a direct rollover and is immediately subject to withholding. In addition, this type of transfer opens the door to a tax burden for that fiscal period. Finally, if you hold on to the money instead of reinvesting it into a qualified retirement savings plan, it will be considered income and will be taxed as such.
Fortunately, a direct rollover avoids all of these problems. By asking the manager of the target fund to perform a “direct SEP IRA rollover,” you legally bind him or her to use that particular financial tool to move your money. In this way, the tax deferred status of your investments is maintained, enabling your funds to continue growing undisturbed for your retirement.