Roll Over a Profit-Sharing Plan to a SEP IRA Without Tax Penalties

Fact checked by Betsy PetrickReviewed by David Kindness

You can roll over a profit-sharing plan into a SEP IRA without taxes being withheld if the transaction is processed as a direct rollover. Through a direct rollover, the assets are made payable to the SEP IRA custodian (or trustee or plan to which the assets are being rolled).

However, if you choose to receive a check for the rollover made out to you with the intent of depositing into your SEP, there will be a withholding penalty, and there’s a time limit for transferring the funds into the SEP.

Key Takeaways

  • You can roll over a profit-sharing plan into a SEP IRA without taxes being withheld if the IRS guidelines are followed.
  • A trustee-to-trustee transfer can rollover the funds, which are sent directly from the plan administrator to the institution holding the SEP.
  • It’s important to check if the SEP custodian can hold all of the assets that are currently in the profit-sharing plan.

Understanding a Rollover from a Qualified Plan to a SEP

Processing a rollover from a profit-sharing plan or qualified plan, such as a 401(k) is fairly straightforward as long as you follow the IRS guidelines for rollovers. However, it’s important to verify that the plan administrator will allow an IRA transfer from the profit-sharing plan into a SEP IRA. Even though the IRS allows transfers from qualified plans into SEPs, the plan administrator is not required to allow it.

If you decide on a rollover into a SEP, there are three rollover options.

Direct Rollover

The direct rollover mentioned earlier, is when you may receive your distribution in the form of a check made payable to the new SEP account. You would take the check to the financial institution and deposit it into the SEP IRA. This is not a taxable event, meaning no taxes are withheld from the transfer amount. However, the plan participant is responsible for taking the check and depositing it into the SEP IRA.

Indirect Rollover

An indirect rollover is when the funds are first distributed to the participant via a check, and then the check is made out to the participant’s name (not to the SEP account name as with a direct rollover). The individual must then roll over the assets (deposit them) into the SEP IRA within 60 days; otherwise, it would be considered a taxable distribution.

However, the administrator of the profit-sharing plan will withhold 20% of the portion of the distribution that’s being transferred into the SEP. In other words, you’ll receive 80% of the balance via a check, but you’re still required by the IRS to deposit 100% of the balance within 60 days into the SEP. As a result, you’ll need to come up with 20% from other funds to roll over the full amount. If you do come up with the funds and deposit 100%, you’ll receive the 20% withholding amount after you file your taxes for that year.

If you don’t come up with the 20%, it will be considered a distribution, and you’ll be taxed on those funds. Also, you’ll receive a 10% tax or penalty if you’re under the age of 59½.

Trustee-to-Trustee Transfer

The trustee-to-trustee transfer is a transfer between the financial institution holding your profit-sharing plan and the institution where the SEP is located. The distribution is made directly from your plan IRA into the SEP IRA. The participant does not receive a check, and no taxes or withholding are withheld from the transfer amount. The trustee-to-trustee transfer is the safest way to transfer the IRA funds since you’ll never receive a check and you’ll avoid any possibility of being taxed or penalized.

How to Begin the Rollover Process

Check with the SEP IRA custodian to determine their documentation requirements (if any) for processing the direct rollover. The administrator of the profit-sharing plan may also have special documentation that the participant must complete to initiate any distribution, including those processed as a direct rollover to another retirement plan. In addition, some plan administrators require the custodian to provide an acceptance letter verifying the type of account to which the assets will be credited.

Provide the SEP IRA custodian with a copy of the most recent statement issued for the profit-sharing plan and ask that they identify any asset on the statement that cannot be held in their IRAs. If the custodian is able to hold all of the assets that are currently in the profit-sharing plan, then all the assets may be rolled to the SEP IRA.

However, if the custodian is unable to hold any of the assets, then those assets cannot be rolled to the SEP IRA, and the participant may need to liquidate the assets to proceed with the rollover to the SEP IRA. Alternatively, the participant may shop around for a custodian that is able to hold all the assets.

Read the original article on Investopedia.

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