IRAs are a great way to save for retirement, and the tax laws provide for several different types of IRAs. In addition to the traditional IRA that you can open yourself, SEP IRAs, also known as Simplified Employee Pension IRAs, are available to workers whose employers choose to adopt them. Rollover IRAs are also available to those who were covered by an employer plan in the past and want to move money out of their plan account into their own IRA. Under some circumstances, you can merge SEP IRAs and rollover IRAs, but it's important to know the tax consequences of doing so.
The unique aspects of a SEP IRA
With most employer-sponsored retirement plans, there are limits to when you can take withdrawals from the plan account. You typically can't make withdrawals from a 401(k) plan or other similar account until you stop working for your employer, unless certain exceptions apply. Hardship withdrawals can be available in some cases for situations involving an immediate and heavy financial need, such as medical expenses, educational expenses, or the purchase of a principal residence. However, plans don't have to provide for hardship withdrawals and can limit permissible uses.
SEP IRA rules are different from most retirement plans in that the employer cannot prohibit distributions from a SEP IRA. Even if the employer adds matching contributions, the worker must have the right to take them out of the account at any time.
Merging retirement accounts
The tax consequences of withdrawing money from a SEP IRA are the same as withdrawing from any other type of IRA. If you take money out of the account for your personal use, then the withdrawal will be added to your taxable income. If you do so before reaching age 59-1/2, then you'll be subject to a 10% penalty.
However, if you do a rollover or direct transfer of your SEP IRA to a rollover IRA, then there are no tax consequences. Because the money stayed in a tax-favored retirement account, the move isn't treated as a taxable event.
Some SEPs allow employees to transfer money from rollover IRAs into their SEP IRA account. In that situation, the same rules apply, and because the move again involves two IRAs, it isn't treated as a taxable distribution. Bear in mind that employers aren't required to allow employees to move rollover IRA money into a SEP IRA, so check first before you start the process.
In general, merging retirement accounts can be a smart move in order to consolidate your retirement savings and get access to the best investments possible. Being able to combine SEP IRA and rollover IRA funds can be a useful tool in simplifying your financial life.
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