Making a SEP IRA contribution to a TIRA.

Submitted by Andrew Spitz on Fri, 2017-05-26 01:14

I have a client who is currently self-employed and has a TIRA with me. His CPA is recommending he make a 2016 SEP IRA contribution; however, he doesn’t have an existing SEP IRA. He has filed for an extension and will complete a SEP adoption agreement. He plans to become a W-2 employee this year and no self-employment income going forward. I recommended he make his SEP IRA contribution into his TIRA so he doesn’t have an additional account with a smallish balance (~$10K). His CPA is unaware that this can be done. I cannot find any tax code or court cases to back this up for the CPA.

My question is: does anyone have any actual documentation that I can share with the CPA? He wants to see something in writing. I have already checked all the IRS publications and can’t find anything. I know this is allowable, from the IRS’ standpoint, it doesn’t matter if your SEP contribution for the year is put into your Traditional IRA or your SEP IRA, and it will be coded as a SEP IRA contribution for 2016, but the CPA would feel more comfortable if he had some documentation to reference in the event it is needed. Thanks in advance!



Submitted by William Tuttle on Fri, 2017-05-26 14:03

  • I can find nothing that either allows or prohibits SEP IRA contributions to a traditional IRA. On the other hand, the IRM and other IRS guidance expressly allows traditional IRA contributions to a SEP IRA. The custodian must allow and track those contributions upon specific notification of the participant/account owner.
  • The reason for this, is that reporting requirements on Form 5498 are distinctly different for traditional IRA contributions and SEP IRA contributions. Traditional IRA contributions are reported in Box 1 and are reported for the tax year of the contribution. This means than contributions before the tax filing deadline for the previous year are reprorted in that previous year’s 5498. SEP IRA contributions are reported in Box 8 and are reported in the year of the contributions. The tax year it is for is irrelevant. Not all custodians will allow or properly reported traditional IRA contributions to a SEP IRA.
  • Traditional IRA custodians have much more strictly controlled contribution requirements. All of them seem to have automatic tracking of the maximum traditional IRA contribution limits based on age. While I do not know this for sure, I would be suprised that even if SEP IRA contributions are allowed to traditional IRAs, custodians are willing or even set up to record and report this properly.
  • I don’t see what the difficulty would be with setting up the SEP IRA, making the SEP IRA contribution there, and rolling over the SEP IRA balance once it has cleared to the traditional IRA. Most custodians will close a SEP IRA account within a couple years of no balance.

Submitted by Alan - IRA critic on Fri, 2017-05-26 18:56

On this issue the IRA custodian will determine if they will accept SEP contributions without the IRA previously being identified as a SEP IRA on the custodian’s records. This is mostly likely an effort by the custodian to avoid employer SEP contributions from being confused with TIRA contributions which could result in the 5498 being incorrectly prepared. In addition a SEP contribution cannot be recharacterized as a non SEP contribution or vice versa. And excess SEP contributions referred to as non deductible contributions are not to be reported on Form 8606 like non deductible TIRA contributions are. Therefore, the custodian will determine if what you want done will be acceptable, and I think those custodians are in the minority which may explain the CPAs impression.

Submitted by John Peterson on Tue, 2017-05-30 17:51

Agree with other commentators that it’s up to the IRA custodians but since CPAs like tax forms have him read the first sentence in Article I of IRS Form 5305 (Traditional IRA) which makes clear reference to an employer SEP contribution as an allowable contribution to a TIRA.

Submitted by Andrew Spitz on Tue, 2017-05-30 18:34

Thank you for all the feedback!  The custodian will allow the contribution and code it as a SEP contribution.  The CPA would like to see something in writing but I can’t find anything that shows it is allowable or not.  I have always thought it was allowable.  If anyone has anything else to offer I welcome it.Thank you again! 

Submitted by Jose Morales on Wed, 2017-05-31 18:46

I can only back what Alan said.  There is no language in the code that says “SEP IRA Contributions are allowed to be made to a Traditional IRA” but the reason for that is that all SEP IRA Contributions are made to a Traditional IRA.  An employer can simply make the contributions to each employee’s existing Traditional IRA if they already had one established and the employer did not force each employee to have an account with any particular IRA Custodian.  It’s something that is simply self-evident, so if you are dealing with someone who has a fundamental misunderstanding of what a “SEP IRA” is it will be very hard to bring them around to understanding the fact that any account in which a SEP contribution is made is already just a Traditional IRA.

Submitted by Andrew Spitz on Thu, 2017-06-01 00:57

Thank you!!!! 

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