How to Transfer a SEP-IRA
A simplified employee pension IRA is a retirement plan set up by the self-employed and small-business employers. Contributions made by the employer are tax-deferred like with a traditional individual retirement account. You may want to take money out of your SEP IRA if you leave your job or want to consolidate your retirement funds.
A SEP IRA is an IRA set up by an employer on behalf of an employee. For the self-employed, it can be used instead of a traditional IRA. SEP contributions can only be made by the employer. The contribution limits are higher than for a traditional or Roth IRA. The maximum yearly contribution an employer can make to a SEP is the lesser of $51,000 or 25 percent of the worker's salary, as of 2013. Most SEPs require the employer to contribute the same percentage of pretax pay to each employee's account.
A SEP IRA can be transferred directly or rolled over into several other types of plans, including a Roth or traditional IRA, a 401(k) plan, or another SEP. Not all custodians allow rollovers into their plans, so review the rules before starting a rollover. If you are moving SEP funds into a Roth IRA, you must include the entire amount in your taxable income in the year of the transfer or rollover. This is because a Roth is funded with after-tax dollars.
Each plan custodian will have different procedures and paperwork to fill out to start a SEP transfer or rollover. If you are dealing with more than one custodian, discuss your plans with each one to ensure the process will go smoothly. If your custodians cannot or will not make a direct transfer, the rollover funds may go directly to you. You have 60 days to transfer the funds into the new plan or the rollover amount will be considered a permanent withdrawal. Then you may have to pay regular income taxes and a 10 percent early withdrawal penalty on that amount.
Before moving retirement funds from a SEP IRA into another plan, research the types of investments allowed in the new plan and whether they will meet your investment goals. For example, if your existing plan allows you to trade options and the new one does not, you may not achieve the same investment returns in the new plan. Alternatively, transferring to a new plan can open up new investment choices that were not possible under an employer-sponsored SEP.
Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.