Help! SEP IRA was transferred into a Traditional IRA...bad?

[soupcxan]

A relative has some self-employment income (going into a corporation she setup) and she had created a SEP IRA at Schwab where she had been making contributions. Earlier this year, I suggested that she transfer the SEP IRA to E-trade (where she already had a Traditional IRA). I had expected the SEP IRA to be transferred into a "new" SEP account at E-trade. However, I just learned that the SEP IRA funds were transferred into the existing Traditional IRA, not into a new SEP account.

Here is the critical question...can her corporation continue to make contributions on her behalf to her IRA now that it is a Traditional IRA? She wants to put the full $7,000 in for 2006 but I am not sure if she needs to open a new SEP IRA or if it is allowed to put the $7k into the Traditional IRA. Can anyone advise?

Moreover, does the IRS even allow you to transfer a SEP into a Traditional IRA? Is this a big screwup that will have tax implications? Do I need to find some way to un-conmingle the funds?

 

[LRAO]

I don't think they would've allowed:

SEP IRA --> Traditional IRA

Instead, I think they would have allowed:

SEP IRA --> Rollover IRA

And to answer your first question, no, she/her corporation can't contribute to the new
account, because it is not a SEP.

She has to open up another SEP.

If she's self-employed, why not go with the solo 401(k)? It's a little more flexible.

I have one at Fidelity, and I also have everything else in-house with them. Makes it nice & easy to keep track...

HTH.

 

[soupcxan]

Oh, E-trade definitely allowed the transfer from the Schwab SEP IRA to the E-trade Traditional IRA...the funds have been there for most of the year. I'm still not sure whether this will cause problems with the IRS.

E-trade won't allow the corporation to make a contribution to the Traditional IRA...they said she has to open a new SEP for that. So I think that's what we'll do, since the end of the year is around the corner.

 

[Martha]

Who made the mistake? What your mother wanted was a trustee to trustee transfer, which simply would have continued the SEP at the new brokerage. Instead, she got a rollover. If E*trade made the mistake, I would tell them to fix it.

Otherwise, start a new SEP. In that case, make sure she was eligible to do a rollover without tax consequence.I think, but I am not sure, that you can rollover a SEP into a traditional IRA any time without tax consequence, but you can't contribute to the SEP anymore.

 

[retire@40]

Here is the critical question...can her corporation continue to make contributions on her behalf to her IRA now that it is a Traditional IRA? She wants to put the full $7,000 in for 2006 but I am not sure if she needs to open a new SEP IRA or if it is allowed to put the $7k into the Traditional IRA. Can anyone advise?

Just curious. Will she get a Form W-2 from her corporation showing gross wages of $28,000 for 2006?

 

[soupcxan]

I think the mistake was on our end, not E-trade (they did what we told them to).

So the real question is, did rolling the SEP into the Traditional make her inelgible to contribute to a SEP for the year. That's a tough one.