The Tax Consequences of Merging an SEP IRA & a Rollover IRA
Original post by Joe Andrews of Demand Media
Both Rollover individual retirement accounts (IRAs) and Simplified Employee Pension (SEP) IRAs are tax-deferred saving accounts. Although investors can have both a Rollover IRA and a SEP IRA, you'll need to decide whether to keep your SEP IRA or Rollover IRA account. There are specific tax ramifications when making the decision which to keep. Fortunately, there are only four possible scenarios when determining the tax implications of merging your SEP and Rollover IRA.
SEP into Rollover IRA - Employed
If you're still employed at the company offering a SEP IRA, you can't legally merge your SEP IRA into your Rollover IRA. If you meet income requirements, you can remove funds from your SEP and make contributions to an IRA but the tax penalties are high. You’ll pay a 10 percent penalty for removing SEP funds if you’re younger than age 59 1/2. You will income taxes at your current tax rate on all proceeds. Finally, you'll be limited to the current year's cap on contributions, which can be less than the total amount you have invested in your SEP.
SEP into Rollover IRA - Separated From Service
When separated from service from a company offering a SEP IRA, you can merge your SEP plan into your Rollover IRA. Call your IRA plan administrator for the appropriate paperwork to merge your accounts. There will be no tax due when you complete the merger, but there might be fees to sell your funds in your SEP and to purchase new funds in your rollover IRA.
Rollover IRA into SEP - Employed
You can merge a Rollover IRA into a SEP account while you're still employed with the company offering a SEP IRA, assuming they accept contributions. There will be no tax consequences when you merge the account. Contact the SEP IRA account for the correct forms to merge your accounts. You can pay fees when selling your IRA funds, and when purchasing your new SEP funds. Track the taxability of your Rollover IRA dollars once you've merged accounts. Any non-deductible contributions won't be taxable when you remove money to spend in the future.
Rollover IRA to SEP - Separated From Service
The tax implications for merging a Rollover IRA to an SEP IRA when you've left the company providing the SEP aren't substantially different than if you're still employed.There are no tax ramifications when merging accounts. You can pay fees when buying or selling funds. You should track any non-deductible contributions made to your Rollover IRA because they won't be taxable when you remove these dollars in the future.
- Bankrate: IRS Rules For Early IRA Withdrawals
- IRS.gov: Individual Retirement Arrangements (IRAs)
- U.S. Department of Labor: Understanding Retirement Plan Fees and Expenses
About the Author
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.