Conversion, Keogh to SEP-IRA?

Since retiring from a university position 8 years ago (I'm now well into the mandatory minimum distribution age range), I've done a modest amount of consulting (on the order of $10K/year total billings) and put the allowed deductible contributions from this income each year into a conventional Keogh plan set up for that purpose. This Keogh is one component of a retirement portfolio managed by TIAA-CREF, which also includes several standard IRAs accumulated during my earlier employment.

Our tax adviser has suggested that there could be some useful, though not necessarily compelling, advantage to rolling the funds in this Keogh account over into a SEP-IRA account that would be set up in the same portfolio (I have no such SEP-IRA at the minute). I could then make any future year contributions from consulting income to this SEP-IRA (although this income is likely to taper down fairly rapidly in any case).

This proposal seems reasonable to me, and TIAA-CREF says, sure, we can easily set up a new SEP-IRA and roll your Keogh over into it. My only query here is whether there are any hidden problems or serious "gotchas" that might emerge later if I did this?

Reply to
AES
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It sounds like your self-employment business has no employees (other than yourself.)

I think you should consider converting your Keogh into a solo 401(k) rather than a SEP-IRA. You will be able to defer more future self-employment income into the solo 401(k).

Steve (not a tax pro)

Reply to
Steve Pope

First - I'd like to know what advantages your tax advisor has mentioned that he thinks would be better served by a SEP-IRA. FYI - besides being an EA I'm also a Registered Financial Consultant and am licensed for securities and insurance work in several states. I got both licenses because a lot of clients come in saying "my broker says I should set up this plan or that plan, what do you think?" and without being licensed for securities work there are limits to how far the conversation can go.

Off the cuff, I can't think of anything that you can do with a SEP-IRA that you can't do with a Keogh. The contribution limits are a bit different, but from your post it doesn't sound like you're concerned with how much you can put in, and you're probably already maxing out anyway.

Not sure if there are any "gotchas" without more info. There may be required minimum distribution issues, since you way you're well into the RMD range now anyway.

Let us know what advantages your tax advisor has and we'll see if we can give you better info.

Gene E.Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

This person said he was well into the RMD age; had consulting billings of $10K; and that billings would be tapering down rapidly given his age. I don't see how this individual can defer more income by rolling over the account to a Solo 401K or for that matter, a SEP-IRA. Given the stated facts, the only way I know to defer more income is to use a defined benefit plan. And.... we all know that those plans come with hefty maintenance costs.

The only possible "useful, though not necessarily compelling, advantage" that may exist by rolling over into a SEP is that TIAA-CREF charges a smaller fee for SEPs than Keoghs and/or the SEP has more flexibility in the investment choices.

The OP should ask the adviser what advantage(s) there are for rolling over from the Keogh to a SEP.

Reply to
Alan

Thanks for correcting me. I have heard informally that one cannot continue to make elective deferrals at the same time as one is receiving RMD distributions, but I confess to not having read the parts of the publications that discuss this.

Steve

Reply to
Steve Pope

Thanks for reply. Actually the potential advantages that are being sought here are not any major or technical advantages I'd expect to gain in tax benefits, but just some minor potential simplicities I'm seeking in how I maintain my own personal financial and estate planning records in a particular personalized record-keeping software program.

So, since the rollover idea came in a response from my tax preparer (who I'm confident is a solidly competent professional), and since doing the rollover itself seemed to be a simple matter, I was just doing some "due diligence" on this newsgroup, asking if there were likely to be any major hidden problems that might result from this rollover?

In any case, thanks again.

Reply to
AES

I think you may have misunderstood me. For this individual, there is no benefit of additional deferral because of the facts presented. You are correct that a 401K allows for additional deferment over a SEP or QRP because the SEP and QRP do not allow for any catch-up contribution for individuals who have attained age 50. Someone age 50 can contribute the maximum of $49K plus the catch-up of $5.5K to a 401K assuming there's enough income.

Reply to
Alan

Alan replies to my post,

Right. I probably am misunderstanding this. A person with $10K of self-employment income, who is not retired or subject to RMD's, is able to contribute and defer from income a little under $10K to a solo 401(k), but could only contribute a little under $2K to a Keogh (which I understand to be an older name for a defined contribution QRP) or a SEP.

I interpret your statement above as saying that for this particular case, the individual could not defer that larger amount into the solo 401(k) anyway.

I'm moderately interested in making sure I understand this correctly.

Thanks

Steve

Reply to
Steve Pope

You forced me to reread the rules. Before, I answer, age is not an issue for Keoghs, SEP-IRAs and 401Ks. Only a traditional IRA precludes contributions after age 70 1/2. Therefore, you can be 80 and as long as you have SE income you can contribute to a retirement plan and you may also be taking RMDs.

If self-employed, maximum contribution to a Keogh is effectively 20% of net SE income. Net SE income is defined as Net Profit less the deduction for 1/2 SE taxes. The contribution is in two flavors: an amount in a money purchase plan and an amount in a profit sharing plan. There is no catch-up provision and the maximum allowed is $49K.

Ditto for the SEP_IRA except there is only one flavor.

A 401K allows you to contribute up to 100% of the first $16.5K or 22K if you're at least age 50. Then you are allowed 20% of Net SE income as defined above. Maximum is $49K unless age 50. Then the max is $64.5K.

So... because the 401K allows 100% of the first $16.5K or 22K, it offers the ability to defer more than the other plans from $one.

I think I got it right this time.

Reply to
Alan

That's good to know.

Yep

Actually I think they got rid of that. From the IRS website:

"Also, in past years, money purchase plans had higher deductible limits than profit-sharing plans. This is no longer the case."

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8949,00.html So, the typical prototype plans -- I am pretty sure -- are I think only profit-sharing plans anymore. The taxpayer can deduct up to the limit, or less than the limit.

Everything you said looks right to me. These plans are still very complicated internally but they have now really streamlined it from the taxpayer/administrator's perspective.

Steve

Reply to
Steve Pope

Some years ago, I converted a Keogh to a SEP-IRA because my Keogh has passed the $100,000 mark which, at the time, meant I had to file form

5500. (The limit has since increased to $250,000.) I haven't regretted it. The way things are always changing, there's always a possibility that later on you could wish you hadn't, but I wouldn't worry about it. I'd say go ahead and convert.
Reply to
Hank Youngerman

Thanks -- I think I will!

Reply to
AES

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