Can I Combine a SEP-IRA and a Profit Sharing Plan?

Under IRS rules, you're allowed to shift money from a SEP-IRA to a profit-sharing plan whenever you want. Your employer can't keep you from taking money out of your account. However, check with your profit-sharing plan first to make sure it accepts rollovers from other accounts. It might not, even though the tax code allows it. You won't be hit with income taxes for moving the money because both accounts are tax-deferred.

Moving money from a profit-sharing plan to a SEP-IRA is also fine under the tax code, but you're not always allowed to pull cash out of your profit-sharing plan. You're limited in withdrawing from such a plan if you're under age 59 1/2, even if you just want to roll the money over to another qualified plan. For example, you can only tap the account after you've left employment or suffered a permanent disability. In some cases, you may be able to take a distribution for a financial hardship, but you're not allowed to roll over hardship distributions.

Using a transfer, sometimes called a direct rollover, offers the most efficient way to get the money from one account to another. With a transfer, you tell your financial institution where you want the money moved and it shifts the cash without any extra work on your part. Because you never touch the money, you don't need to have any of it withheld for income taxes or report the transfer on your return.

Rollovers occur when you take a distribution from one plan and redeposit the money in another plan in 60 days. If you miss the deadline, you're stuck with a permanent distribution, which is hit with taxes and a 10 percent early withdrawal penalty if you're under 59 1/2. When you take the withdrawal from your SEP-IRA, you can opt out of tax withholding.

If you take the withdrawal from a profit-sharing plan, your employer withholds 20 percent that you won't get back until you file your tax return. Unless you come up with that 20 percent out of pocket, that slice of the rollover is considered distributed. You're limited to one rollover from any account in a given year.