Can I Combine SEP IRA & 401(k)?

by Wilhelm Schnotz ; Updated April 19, 2017

If one of your retirement funds isn’t performing as well as the others, or you want to combine a couple retirement accounts, consolidating an simplified employee pension individual retirement account (SEP IRA) and 401k is a relatively straightforward transaction. Because both types of accounts are made with pretax contributions, you won’t incur income taxes in the process, but you’ll need to determine which account you want to maintain, as rules that govern distributions and administration of SEPs and 401ks differ slightly.

SEP IRA and 401k Rollovers

Although the Internal Revenue Service places limits on rollovers between some types of qualified retirement accounts, it allows you to transfer funds between a SEP IRA and a 401k plan. As with any other rollover, if plan administrators don’t provide a trustee-to-trustee transfer between the two accounts, you’ll need to close one account and reinvest funds into the remaining one. If you fail to complete the transaction in less than 60 days, the IRS treats it as a premature distribution and asses a 10 percent penalty on the amount, in addition to requiring you to pay income taxes on it.

SEP IRA Basics

How you’ll access your retirement accounts in the future depends on into which account you combine the assets. If you maintain your SEP IRA, you won’t be able to begin receiving distributions until you reach age 59 1/2, and the IRS requires you to begin taking distributions by age 70 1/2. If you need to access retirement funds before retirement age, you can make a hardship distribution to help fund the purchase of your first home, to pay medical bills, to avoid foreclosure or if you become disabled and can’t work.

401k Basics

While the general rules that govern 401ks are similar to those for SEP IRAs, it allows plan administrators room to craft some of the specifics. Some 401k plans allow you to borrow up to $50,000 from your plan, repaying it with interest through future payroll deductions. The plan administrator determines policies regarding hardship distributions. Loans and hardship distributions aren’t a feature of each 401k.

Other Rollover Options

Instead of combining SEP IRA and 401k assets into a single account of one type or the other, you can close both funds and move them into another form of retirement fund. The IRS allows investors to move funds from SEPs and 401ks to all types of retirement funds, with the exception of SIMPLE IRAs and, in the case of funds in an SEP IRA, a Roth 401k. So you may combine the assets in a traditional IRA, a Roth IRA, a 457b or a 403b plan. If you roll over funds from a 401k and a SEP IRA into a Roth account, you’ll owe income taxes on the amount you roll over. When you receive distributions from a Roth account, however, you’ll receive them tax free.

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About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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