SEP Inquiry
Hello,
We know that SEP IRAs can accept both employer SEP contributions and individual Traditional IRA contributions. However our custodian does not allow the opposite; SEP contributions must be made to a SEP IRA and cannot be made to a Traditional IRA. One of our advisors is questioning the policy and is saying that the IRS allows for SEP contributions to be made to Traditional IRAs.
In doing some research it does appear there are some references that may support the advisors assumption. See below. However my thought is that when these regs reference “Traditional IRA,” it may be referring to something in the IRC language rather than just a general Traditional IRA registration. The IRS says in many places that Traditional IRA contributions can be made to SEP IRAs, but doesn’t say the vice versa anywhere.
Would be curious to know your thoughts. Thanks!
Pub 560
Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained.
5305-SEP
Simplified employee pension. A SEP is a written arrangement (a plan) that provides you with an easy way to make contributions toward your employees’ retirement income. Under a SEP, you can contribute to an employee’s traditional individual retirement account or annuity (traditional IRA). You make contributions directly to an IRA set up by or for each employee with a bank, insurance company, or other qualified financial institution. When using Form 5305-SEP to establish a SEP, the IRA must be a Model traditional IRA established on an IRS form or a master or prototype traditional IRA for which the IRS has issued a favorable opinion letter. You may not make SEP contributions to a Roth IRA or a SIMPLE IRA. Making the agreement on Form 5305-SEP does not establish an employer IRA described in section 408(c).
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2023-03-15 15:32
While the advisor is technically correct, mixing SEP and TIRA contributions among accounts greatly increasing the chance of a custodian reporting error on Form 5498. If either the employer/EE or the custodian makes an error and the 5498 is incorrect, a tax reporting error occurs. SEP and TIRA contributions cannot be recharacterized into a different contribution type because the former is an employer contribution and the latter an individual contribution. Withdrawal of the excess contribution, paying an excise tax up to 10%, and losing a contribution year are the possible consequences. Therefore, to avoid these problems it is advisable to make only SEP contributions to a SEP IRA, and only TIRA contributions to a non SEP IRA. This becomes even more of an issue given the expansion of SEP plans to include Roth contributions under Secure 2.0.
Permalink Submitted by David Mertz on Wed, 2023-03-15 18:11
If the custodian’s policy is to not accept SEP contributions into an IRA that is not marked in their system as a SEP-IRA (which I would expect is the case with most custodians), it means that they will report any deposits into the IRA (other than rollovers, conversions, recharacterizations or repayments) as being regular contributions in box 1, not SEP contributions in box 8. The IRS seeing the amount in box 1 will then expect the contribution to have been reported on Schedule 1 as a deductible traditional IRA contribution or on Form 8606 as a nondeductible traditional IRA contribution, not anywhere as an employer contribution. One *really* does want such a tracking and reporting complication, so one should only make the SEP contributions to an IRA that has been established as a SEP-IRA.