change from SEP to Simple IRA

[Maggie]

I have a self-employed client with no employees. He has maintained a SEP IRA for about 10 years, and now wants to instead contribute to a Simple IRA (provides a larger deduction). I understand he can't maintain 2 plans for the same business. Does he simply stop contributing to the SEP and begin contributing to the Simple IRA? I also understand that the SEP can't be rolled to the Simple....correct? Thanks!

[veritas]

You can not have

another plan with a Simple. Maybe a single 401k would be a better choice anyhow.

[Bees Knees]

IRS Pub 560, page 9 says:

Other qualified plan. The SIMPLE IRA plan
generally must be the only retirement plan to
which you make contributions, or to which benefits
accrue, for service in any year beginning with
the year the SIMPLE IRA plan becomes effective.

In other words, if you do not make contributions to a plan or allow benefits to accrue for services performed during the year, you are not maintaining another plan for purposes of the one plan requirement for SIMPLE IRAs. In the case of a SEP IRA that the taxpayer already has, nothing new can be contributed to the plan as long as there is a SIMPLE IRA. I do not believe there is any requirement to roll the SEP IRA over into a traditional IRA prior to setting up the SIMPLE IRA. The rule merely means you can’t contribute to a SEP IRA and a SIMPLE IRA at the same time.

[Maggie]

thanks

Thanks for your input!

[Kram BergGold]

Disagree with Bees

If a Self Employed person has both a SIMPLE and a SEP he could switch back and forth every other year. If he had employees, the rules for coverage are different for each. By switching he might be able to avoid covering many employees. I believe the SEP must be terminated by rolling it into an IRA and then the Simple needs to be set up prior to the deadline, which is I think Sep 30 or OCT 31 I can't remember which.

[Bees Knees]

If a Self Employed person has both a SIMPLE and a SEP he could switch back and forth every other year. If he had employees, the rules for coverage are different for each. By switching he might be able to avoid covering many employees. I believe the SEP must be terminated by rolling it into an IRA and then the Simple needs to be set up prior to the deadline, which is I think Sep 30 or OCT 31 I can't remember which.

I understand your theory, but I don’t see it anywhere in writing. Technically, money in a SEP IRA is treated the same as a traditional IRA. Nothing requires the SEP plan to contribute each year. And no benefits accrue for services performed in a year when no contributions are made. So your theory really does not support what is said in the IRS Pubs about this.

As to switching back and forth between a SEP IRA one year, and then a SIMPLE IRA the following year, so what? As long as you don’t contribute to both in one year, no rules are broken. Plus it would be difficult to do since the SIMPLE IRA requires the employer to either match 2% or 3% each year, and no less than 1% in any year. So you really could not go back and forth between a SEP IRA and a SIMPLE IRA without completely closing down the SIMPLE each time and starting all over again with a new plan each subsequent year. No employer in his right mind would even want to do such a thing, so I don't believe it is even an issue.