Conversion, Keogh to SEP-IRA?


A

AES

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?
 
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S

Steve Pope

AES said:
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?
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)
 
G

Gene E. Utterback, EA, RFC, ABA

AES said:
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).
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.
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?
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
 
A

Alan

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)
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.
 
S

Steve Pope

Alan said:
On 7/18/11 9:36 PM, Steve Pope wrote:
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.
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
 
A

AES

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
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.
 
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A

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
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.
 
S

Steve Pope

Alan said:
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.
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
 
A

Alan

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
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.
 
S

Steve Pope

Alan said:
On 7/19/11 7:38 PM, Steve Pope wrote:
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.
That's good to know.
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.
Yep

The contribution is in two flavors: an amount in a
money purchase plan and an amount in a profit sharing plan.
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."

http://www.irs.gov/retirement/article/0,,id=108949,00.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.
There is no catch-up provision and the maximum allowed is $49K.
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.
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
 
H

Hank Youngerman

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?
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.
 
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A

AES

Hank Youngerman said:
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.
Thanks -- I think I will!
 

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