sep deposit
I have a client who has an existing Traditional IRA. He started working at a new company and received a SEP contribution. Can this be deposited directly into the Traditional IRA or do I need a SEP account to deposit into and then transfer to his Traditional. Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2017-03-15 17:17
He must open a SEP IRA account in order to receive a SEP contribution. Or he could ask his TIRA custodian if that account can be amended to accept SEP contributions. Any contribution must be identified as a SEP contribution when made and also a traditional IRA amended to accept SEP contributions or an IRA opened as a SEP IRA can accept a SEP contribution. However, if client wants to only have one IRA account and must open a SEP IRA, he could transfer the TIRA into the SEP IRA and continue with only that SEP account.
Permalink Submitted by John Peterson on Wed, 2017-03-15 18:57
Under the tax law there is no such thing as a SEP IRA and there is no structural difference between a TIRA that will accept SEP contributions and one that won’t (see for example IRS Form 5305 which references acceptance of employer contributions to a SEP in a TIRA).It may be that IRA custodians may insist for their own reasons to house SEP contributions in a separate IRA but there’s absolutely no legal requirement to do so.
Permalink Submitted by Jon Heller on Wed, 2017-03-15 19:00
Ok so I have conflicting answers. Do we have a consensus as to what is the best practice. Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2017-03-15 22:41
The selected custodian will determine the options. I think the vast majority will require a SEP IRA to be opened so that is what I suggested. But I also indicated that the existing TIRA Custodian be asked if they will accept SEP contributions to that IRA account, so there is no conflict in the two posts. I just don’t think most custodians require a separate SEP IRA. Perhaps the reason is related to reporting the contributions correctly on Form 5498, since a contribution must be reported as SEP Contribution in order to exceed the 5500 TIRA limit. Further, the IRS determines whether you are a participant in an employer plan for SEP contributions IN the year the contribution is made, not FOR the year it is made. That affects the deduction for a TIRA contribution, which by the way can be made to the SEP IRA as long as it is flagged as an IRA contribution, not a SEP contribution.Any IRA account that receives both SEP and TIRA contributions may be prone to reporting errors, or also prone to the taxpayer not clearly specifying the type of contribution being made at the time of contribution. Finally, note that recharacterization CANNOT be used to change a contribution between SEP and TIRA or vice versa.