When to Do an SEP IRA Rollover

An SEP IRA rollover is a smart financial move under the right circumstances. SEP stands for simplified employee pension plan. It is an IRA with higher contribution limits for self-employed individuals and small business owners. If you move your SEP under the wrong circumstances and conditions, you may pay dearly. Knowing when and how to roll over your account is important. This involves important decisions with long-term consequences and should be done carefully. If you move money from one account to another in the wrong way, the IRS may consider the transaction an early distribution. Therefore, make sure the money is sent directly to the new company and not to you. Money sent to you will be considered an early distribution. Early distributions are subject to taxes and a 10 percent excise tax penalty. Therefore, an individual in the 35 percent tax bracket would pay 45 percent of the distribution in taxes and penalties. If you lose money to penalties and excessive taxes, it will impact the growth of your retirement fund.

As with most qualified retirement plans, your money grows on a tax-deferred basis. This means your money can accumulate for many years before the tax bill is due. At retirement, you pay taxes on the money you withdraw, while the balance remains tax deferred. This means you have the advantage of spreading your tax liability over time. You also lose the advantage of compounding. Because you are saving for retirement, your money has many years to grow and compound. A dollar in your account today can increase considerably in value before you withdraw it at retirement. Your contributions and the growth in your account are sheltered from taxes. You lose these advantages when you are required to pay taxes on your account before retirement.

Rollover Opportunities

Generally the IRS permits rollovers when you change jobs or reach age 59 ½. In most cases, if you remain in your job and are under the age of 59 ½, the IRS will not permit a rollover. Yet changing jobs is a rollover opportunity, and if you are a small business owner, you can roll over your SEP if you discontinue your business.

You are not required to withdraw money from your SEP IRA until you reach 70 ½. You can start taking distributions at age 59 ½ without penalties. However, all distributions will be considered taxable income in the year you receive them. If you are not ready to retire and take distributions, age 59 ½ presents another rollover opportunity.

Reasons to Roll Over

The primary reason to roll over an SEP IRA is to consolidate plans. SEP IRAs can be rolled into other qualified retirement plans such as 401ks, 403bs and other IRAs. Fewer accounts are easier to manage and track. You may also be able to take advantage of professional management, which is common in large 401k plans but not often available in SEP IRAs. Separation from service is another reason to consider a rollover. Many experts recommend rolling over your retirement when you change jobs. You can either roll into your new company’s plan or into a self-directed plan. Either plan can give you a greater sense of control.

blog comments powered by Disqus