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Merlo
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Category: Tax
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Question relates to a desired tax free rollover of SEP IRA

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Question: relates to a desired tax free rollover of SEP IRA funds to a 401(k).

Years ago, I established and funded a SEP IRA for my sole proprietor business. I closed that business down and now work for the State of California. CA State employees may establish 401(k) or 457 plans through the Savings Plus Program (SPP). SPP will allow the rollover of "Traditional IRA's" (which I think a SEP IRA falls under), but would such a rollover be free of income tax/penalties? One reason I want to do it is for the option of a loan from the 401(k). Since loans are generally not allowed from IRA's, this type of rollover (if allowed tax free) would seem like a loophole.
Submitted: 4 years ago.
Category: Tax
Expert:  Merlo replied 4 years ago.

Hello JA Customer,

 

Yes, you may rollover the funds in your SEP IRA to your employer's 401k account tax free, as long as their plan allows this.

 

I am giving you a link to a page on the IRS website which discusses rollovers from various plans. There is an additional link on that page to a helpful "rollover chart" which shows what plans can be transferred to other plans.

 

http://www.irs.gov/retirement/participant/article/0,,id=211527,00.html

 

Here is a link to the rollover chart.

 

http://www.irs.gov/pub/irs-tege/rollover_chart.pdf

 

You will see in the chart that rollovers are permitted from the SEP IRA to any qualified plan, which would include a 401k.

 

You are correct that the only portion of your SEP IRA that could be rolled over are the funds which are tax deferred.

 

If this was helpful please press the Accept button. Positive feedback is also appreciated.

 

Thank you JA Customer

 

 



Edited by Merlo on 5/1/2010 at 5:53 PM EST
Customer: replied 4 years ago.

 

Thanks for your answer Merlo. I had seen the references on both of these links before. As far as I know, all of the funds in my SEP are tax deferred as I put them in pretax (reported them as deductions on my tax returns). Items of confusion for me in IRS Pub. 590, page 23, were these two statements:

 

1) "You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan" (my underline added); and

2) "However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRA's or do not roll over is at least equal to your basis."

 

So, for example, can I rollover, tax free, all of my SEP to the SPP 401(k)?

Expert:  Merlo replied 4 years ago.

Hello again JA Customer,

 

These statements only pertain to someone who has an IRA account which contains both after tax and pre tax contributions. It would not apply in your case.

 

Basically when you have an IRA that contains both after tax and pre tax contributions, you cannot simply pick and choose which funds to roll over. It has to be done on a percentage basis. That is why they are saying that you cannot just leave in the amount equal to your basis. The entire rollover in that situation would be taxable.

 

If this was helpful please press the Accept button.

 

Thank you JA Customer

 

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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