SEP-IRA accept Traditional IRA contribution?
I have a client who owns a small business with a handful of employees that includes his spouse. Am I accurate in assuming that both the business owner and his spouse can have accounts respectively registered as a SEP-IRA’s with the custodian but contribute to them as though they are Traditional IRA’s, within limits of course?
They just aren’t in a cash flow position with the business yet to defer more than what the Traditional IRA limits are but they hope to be in the not too distant future so they want that flexibility in the registration. They realize that should they actually make SEP contributions in the truest sense that they’ll need to do so proportionately for all eligible employees as well.
Finally, assuming I’m correct on the SEP-IRA being able to accept Traditional IRA contributions, does the fact that they’re going into a SEP-IRA potentially hinder the deductibility for either of them when it comes to being covered by an employer sponsored plan so long as the contributions are considered to be Traditional in the truest sense and accounted for as such?!?
Permalink Submitted by Eric Clark on Fri, 2009-03-20 19:41
Does anyone have an opinion on this? It would be much appreciated.
Permalink Submitted by Jose Morales on Fri, 2009-03-20 19:49
An IRA Account that has “SEP” in the vesting can accept a Traditional IRA contribution, just as an IRA account without such vesting can accept a SEP contribution. Once the funds are deposited into the account they are considered traditional IRA funds regardless of how the account it titled.
Permalink Submitted by mk foss on Sat, 2009-03-21 01:34
I didn’t answer this initially because it raised a question with me.
Although everything said above is true that a traditional IRA contribution can be made to a SEP IRA, the fact that they have a business but are not making contributions from the business for themselves or employees bothered me. If IRS receives a Form 5498 for a SEP IRA and there are only contributions from owner-employees will that raise a question?
Custodians do not or will not keep track of SEP contributions as being from the employee or the employer on a consistent basis.
If I wanted to avoid questions, I’d put the money in a traditional IRA first and then transfer it to the SEP later.