Can an Existing IRA Be Turned Into a SEP IRA?

SEP-IRA stands for Simplified Employer Pension-Individual Retirement Account. It's a good way for you to get a good pension program from a small business or to set up your own plan if you're self-employed. Under a SEP, each employee has his own IRA, and the employer can contribute up to 25 percent of wages in addition to the employee's contribution. If you're self-employed, you are the employer.

A SEP is actually separate IRAs combined under one program created by an employer, which can be a corporation, a partnership, a limited liability company or a sole proprietorship or self-employed person. The employer creates a separate IRA for each employee. Employer contributions don't count as income for the individual, and the employer can deduct contributions from income for taxes.

You can combine your existing personal IRA with a SEP program if you meet the proper conditions. This can vary with how the SEP is created and what financial institution is holding it. To do so, you basically close your existing IRA and transfer its funds to the SEP IRA. Your existing IRA cannot be a Roth plan.

A traditional IRA and a SEP IRA are both tax-deferral plans; you deduct your contributions from income for tax purposes, but you will pay taxes when you withdraw the funds at retirement. A Roth uses after-tax money but is tax-free when you retire.

You can claim a tax deduction for up to $6,000 a year contributed into a traditional IRA, or $7,000 if you are over 50, but you can usually defer up to 25 percent of your net earnings in a SEP. For 2019, employee compensation of up to $280,000 is eligible for SEP consideration.

You can convert SEP IRA contributions from an employer into a Roth IRA once they are made, but you'll have to pay taxes before funds are put into a Roth account. The advantage of a Roth IRA is that withdrawals at retirement, after age 59 1/2, are not taxable, including any interest earned over the years.

If you're self-employed or the sole owner of a business, you can create a SEP IRA in your own name and generally can contribute up to 25 percent of your net self-employed income or business profits. If you had an existing IRA before you became self-employed or went into business for yourself, you can combine it with a SEP if it is not a Roth IRA.