Simple IRA Rollover versus SEP IRA Rollover – How to Choose

21 Jul

In many ways, the choice between a Simple IRA rollover and a SEP IRA rollover has already been made for you.  The IRS has already – in its ever-so-gracious wisdom – defined which types of retirement accounts can and cannot receive rollovers from other types of accounts.  Consequently, this is decision that you, as an account holder, have very little choice about, depending on the structure of your original retirement account.  However, there are some choices you can make between the Simple IRA and an SEP IRA that will both minimize your trouble and pain and maximize the return on your investment.

There is one instance, however, in which you actually are able to choose a Simple IRA over an SEP IRA (or visa versa).  If you’re setting up an IRA because you’re either trying to consolidate several retirement accounts or you’re a self-employed business owner (even if you’re a small business owner with a sole proprietorship), then you can consider either a Simple IRA rollover or a SEP IRA rollover.

In general, Simple IRAs live up to their name.  They’re often recognized for requiring little to no cost of administration and utilize a relatively simple structure for making deposits – whether or not they’re matched by the employer.  The time to give serious consideration to a Simple IRA is when you’re a small business owner with fewer than 100 employees.  They’re a good way to get your feet wet in the world of retirement accounts while offering a very desirable benefit for your employees.

Conversely, the SEP IRA is wonderful tool to use when you want to include yourself as the business owner in a retirement account along with your employees.  In general, SEP IRAs offer higher contribution limits than most other types of retirement accounts.  As a participant in one of these plans (whether as the employer or as an employee), you’ll be able to accumulate retirement saving much faster than with other types of retirement accounts.

If your career has had several stops and starts and you find yourself with several different retirement accounts, it’s a good idea to consolidate them under one account.  This is when the choice as to the best type of IRA will come into play for you as an individual.  In order to determine whether a Simple IRA rollover or a SEP IRA transfer is best for you and your long-term retirement plans, consult your financial professional.  He or she will be able to direct you through the maze of regulations, rules, and taxes pertaining to these types of transfers.

Whichever type of account you choose, keep in mind that – in most cases – it’s best to choose a direct rollover to move your funds.  To take advantage of this preferred tool to transfer your money, contact the manager of the retirement account you want the money to end up in and inform him or her that you want to initiate a direct rollover to your new Simple IRA or SEP IRA.  This sets in motion a specific set of events that causes the money to be transferred from one retirement account to another, preventing its tax-deferred status from being jeopardized.

Of course, all of this happens according to the IRS rules and regulations, but the take home message is that you, as the account holder, never receive the funds.  The IRS regards this as a reportable event, but not a taxable one, so you won’t be liable for income taxes or other penalties on your Simple IRA or SEP IRA rollover.  The account managers will take care of most of the paperwork, so that all you have to do is sit back and wait for notification that the transfer has occurred.

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