A SEP, or Simplified Employee Pension Plan, is an IRA-based employer retirement plan that’s very similar to a profit sharing plan. All SEP contributions are made by your employer. The employer decides how much to contribute for the year, anywhere from 0% to 25% of an eligible employee’s compensation with a maximum of $51,000 for 2013. After your employer decides how much to contribute, that contribution will be deposited into your IRA. Note that SEP contributions can never be made into your Roth IRA or your SIMPLE IRA.
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. That’s because SEP money is treated like your other IRA money with regards to how it’s taxed, the IRA rollover rules, and the required minimum distribution (RMD) rules at age 70 ½ and later. So, if you want to have your SEP contribution deposited into your existing Traditional IRA, that’s fine as far as the IRS is concerned. Your SEP funds don’t have to be kept in a separate IRA. However, your financial institution may want you to keep them separate.
If the IRA only contains SEP funds, it’s often called a SEP IRA. For tax purposes though, all of your Traditional IRAs, including your SEP IRAs, are treated as one IRA. Therefore, there’s no tax advantage to keeping SEP funds in a SEP IRA. So if you ever want to move or combine your SEP IRA money with your Traditional IRA money via a rollover or transfer, that’s allowed. While some institutions won’t allow you to combine SEP funds with other IRA funds, you could simply roll over or transfer your SEP funds to a Traditional IRA with a different institution that does allow it.
- By Joe Cicchinelli and Jared Trexler