How to Transfer Keogh to SEP

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An SEP is a Simplified Employee Pension plan. According to the IRS, "An employer may not adopt [an] IRS Model SEP if the employer maintains another qualified retirement plan." To comply with this rule, a single employee, self-employed Keogh Defined Contribution Plan participant must terminate the Keogh Plan and transfer all the assets to a new SEP-IRA effective the following year. The final distribution of assets from the old plan must be completed within one year of the plan termination date to comply with the "as soon as administratively feasible" wording under Revenue Ruling 89-87.

Instructions

Keogh to SEP Transfer Procedure

1. Terminate the existing single employee Keogh Plan. Assuming this plan has been regularly funded, make the final contribution before the plan termination date and file the Form 5500-EZ final return within seven months of the end of the plan year. The 5500EZ filing can be used only if plan assets do not exceed $250,000 by the end of the plan year. Larger plans require the use of the regular Form 5500.

2. Write a letter, signed by the self-employed business owner, declaring why the plan was terminated and that during its existence, it had adopted all federal plan change amendments to maintain compliance. The letter must also state the total distributable amount as of the plan termination date. Some pension administrators automatically request IRS Form 5310 Determination Letters (DL) for all plan terminations. Others reason that in the case of small single employee plans that are in compliance with current law, DLs would unduly delay the termination process and are probably not necessary. If the terminating Keogh was a Defined Benefit Plan covering several employees beside the owner, the termination procedure is more complicated and a DL should be requested.

3. Establish a SEP-IRA account with a financial institution of your choice or a self-directed plan through an online broker. Tell them you terminated a Keogh last year and now want to do a direct transfer to a new SEP-IRA. The new plan sponsor will ask for an authorization letter from the prior plan trustee, a copy of the most recent account statement, a completed Form 5305-SEP and their own account application. A trustee to trustee transfer does not qualify as a distribution, unlike a rollover. Hence, there is no Form 1098-R notification to the IRS and no reporting of the transfer on the personal 1040 tax return.

4. Request a transfer authorization form, if any, from the current plan trustee. Fill it out and mail it together with the completed Form 5305-SEP and new account application to the new trustee. Remember, the new SEP cannot be executed until the beginning of the calendar year following the Keogh termination date.

References

• IRS Publication 590: IRA as a holding account (conduit) forrolloversto other eligible plans
• Atlantic Financial, Inc.: IRA SEP and SEP IRA Plans
• IRS Form 5305-SEP: When not to use Form 5305-SEP
• Tax Almanac: Discussion: Ending Keogh; Starting Simplified SEP
• Bogleheads Investment Forum: Considering ending a one-person Keogh Plan
• IRS Form 5500-EZ