Can you recharacterize from Traditional to SEP?
Hi there,
Can you recharacterize a contribution from Traditional to SEP? It seems possible, but the reporting seems to be messy on the 5498.
Furthermore is an institution obligated to offer this recharacterization process if a customer requests it?
Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2015-07-07 17:34
No, a TIRA contribution cannot be recharacterized as a SEP contribution because a SEP contribution is made by the employer and the TIRA contribution is treated as being made by an employee. The TIRA contributution must be returned with allocated earnings, then a new SEP contribution made if the time limit has not expired.
Permalink Submitted by abura98 on Wed, 2015-07-08 15:01
Hi Alan,Thanks for the quick response. Would you say this is true also if the SEP IRA owner is self-employed, and thus the employee AND employer?This post indicates that it IS possible, but it’s complicated:https://www.bogleheads.org/forum/viewtopic.php?t=106545And if it is possible in this one scenario, would an institution then be obligated to offer the service?Thank you again
Permalink Submitted by Jose Morales on Wed, 2015-07-08 18:04
The post referenced is not correct. In the new publication 590B, page 29 under “Recharacterizing to a SEP or SIMPLE IRA” it is made clear that only Roth conversions from a SEP or SIMPLE IRA can be recharacterized back to a SEP contribution.
Permalink Submitted by Alan - IRA critic on Wed, 2015-07-08 19:15
The IRS Reg cited in the boglehead link is clear that a SEP contribution cannot be recharacterized as a contribution to a different type of IRA (Roth or employee TIRA contribution). The apparent reason is that contributions required to be made by an employer (SEP or SIMPLE) cannot be changed to contribution types that are made by INDIVIDUALS. While the reverse is not stated, it is inferred by two factors. First is the conversion recharacterization exception in Pub 590A, which by it’s wording infers that a similar exception does not apply for regular contributions. Second, if only an employer can make a SEP or SIMPLE contribution, logic would suggest that an individual contribution also cannot be changed through recharacterization to an employer contribution since the individual would be initiating that recharacterization, not the employer as required. Therefore, the IRS should have clearly stated that a regular contribution with an employer contribution on EITHER END cannot be recharacterized, notwithstanding the conversion exception.