Funding a SEP from a TIRA
Greetings! I have a self-employed client that has presented a scenario which I would appreciate some advise from some one smarter than me. My client is self employed and currently has a TIRA but does not have a SEP. He would like to open and contribute to a SEP for tax year 2011. He is trying to reduce a significant tax liability for 2011. He would like to make the maximum allowed contribution to his soon to be opened SEP. His only way of funding it at this present time is from a distribution from his TIRA. Is there any tax code issue with this funding approach?
It is understood that he will be facing a 10% early distribution penalty and the distribution would be taxable in 2012. If the proposed funding of the SEP is permissable, I assume that he would have 60 days to “pay back” his distribution. My client makes good money throughout the year on a non-regular basis. His follow up question to me was….would it be permissable to “pay back” his TIRA distribution from a distribution from his soon to be opened SEP. If so….would he then have 60 days to pay back his SEP.
Thanks for any assistance!
Permalink Submitted by Alan Spross on Sun, 2012-02-19 18:21
He could fund the SEP by taking a distribution from the TIRA and then making a new contribution to the SEP IRA.
He could also take a SEP distribution within 60 days in order to complete the rollover of the TIRA distribution. But at this point he has increased his taxable income in 2012. He cannot do another rollover from the TIRA for 12 months after the first distribution, so it is not clear where the money will come from to complete the SEP rollover within 60 days. I suppose he could partition his TIRA by direct transfer before this all begins into two or even more TIRAs so that a rollover could be completed from or to each of them. That would allow him to extend this an additional 60 days for each additional account opened. Of course, he must have a high enough balance in his TIRA to fund this approach.
People have done this without the IRS disallowing it for the most part, even though the more IRA accounts that are created and used, the more likely the IRS might be to look at them as fraudulent conveyance vehicles designed solely to get around the one rollover per account limit for 12 months.
The only way out of this cycle is to get current on his taxes by paying quarterly estimates, and then he will be able to stop the distributions.