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The Switch from a SEP-IRA

By Karen E. Klein Q: I am 100% owner of a small, subchapter S company and I have a SEP-IRA that has built to $80,000 over the last 15 years. My outfit has contributed the funds into my account. May I rollover them into a 401(k) under the new EGTRRA rules? -- S.T., Duluth, Ga.

A: The Economic Growth & Tax Relief Reconciliation Act of 2001 (EGTRRA) was significant tax legislation signed by President George W. Bush in 2001. It included a number of major provisions, including changes in the estate-tax rates and amended pension-plan rules. You can take a look at the pension provisions, including a section on rollovers, by visiting the Web site of the Society of Actuaries.

With respect to your particular situation, a rollover of your SEP-IRA funds into a 401(k) is indeed permitted under EGTRRA, says CPA Gregg Wind of Wind & Associates in Marina del Rey, Calif. A 401(k) is an uncommon choice for a small corporation, Wind says, but not unheard of.

BETTER PROTECTION. "I guess the obvious benefit for someone wanting to roll a SEP-IRA into a 401(k) is simplicity. Rather than having separate accounts from separate plans, the funds can be consolidated into a smaller number of accounts, or even one account," he notes. "Another benefit is that a 401(k) affords some degree of creditor and legal protection, as a 'qualified' retirement plan, while a SEP-IRA, like a regular IRA, does not."

A 401(k) plan also can including borrowing provisions, allowing the account holder to take out a loan against the account, says Wind, who adds that the amounts must be evidenced by a promissory note and repaid in accordance with the terms of an amortization schedule. By contrast, borrowing against a SEP-IRA (or regular IRA) account is generally not permitted.

If you decide to proceed with the rollover -- and Wind says he does not see any significant drawbacks -- Wind recommends arranging for a "direct rollover," meaning that the funds will be sent directly from your existing account to the new plan administrator. Such distributions are not subject to the mandatory 20% federal income-tax withholding. If you receive the money from your current SEP-IRA administrator or custodian, you will have to reinvest it within 60 days or the distribution will become taxable.

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