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I've posted a few comments here and thought a brief introduction would be in order. I'm here mainly because of my work on a Tax Guide for Investors that appears at the web site referenced below. (In real life I'm a tax lawyer in Chicago.) I started it as a general guide for investors and spent a fair amount of time hanging around the Tax Strategies Board. But I quickly saw that the hottest topic was Roth IRAs and jumped into that with both feet. I ended up posting nearly 100 pages of guidance on this subject on my web site. In addition, being a professional nitpicker (and wanting my web site to be accurate in every detail) I have been in contact with people in Washington who are writing the technical corrections act and preparing IRS guidance on Roth IRAs.

Within available time constraints I'm happy to help where I can, although it doesn't appear there is much of a need. Pixy is doing a terrific job, and there is a tremendous wealth of other talent here as well. I'm really here more to learn what I can, both from those who ask questions and those who provide answers.

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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KAT,

<<Within available time constraints I'm happy to help where I can, although it doesn't appear there is much of a need. >>

Help away.

Maybe you can start by telling us what you've learned regarding converting a SEP-IRA directly to a Roth. Some pros say it's possible as nothing prohibits it, my legal department has said no because the SEP is treated like a qualified plan. Me? I've been waiting impatiently for IRS guidance. Have your sources touched on this issue?

Regards.....Pixy
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<<Maybe you can start by telling us what you've learned regarding converting a SEP-IRA directly to a Roth. Some pros say it's possible as nothing prohibits it, my legal department has said no because the SEP is treated like a qualified plan. Me? I've been waiting impatiently for IRS guidance. Have your sources touched on this issue?>>

OK, you asked for it! First let's look at the law. Section 408A(e) of the Internal Revenue Code defines "qualified rollover contribution" and reads in part:

<<quote>>
(e) QUALIFIED ROLLOVER CONTRIBUTION-
For purposes of this section, the term "qualified rollover contribution" means a rollover contribution to a Roth IRA from another such account, or from an individual retirement plan, but only if such rollover contribution meets the requirements of section 408(d)(3).
<<end quote>>

So the question is whether a SEP IRA is an "individual retirement plan." If it is, you can roll it.

Now turn to Code section 7701(a)(37), which defines "individual retirement plan":

<<quote>>
(37) Individual retirement plan
The term "individual retirement plan" means--
(A) an individual retirement account described in section 408(a), and
(B) an individual retirement annuity described in section 408(b).
<<end quote>>

Now we're almost there. Turn to Code section 408(k)(1) which reads in part:

<<quote>>
(k) Simplified employee pension defined
(1) In general
For purposes of this title, the term "simplified employee pension" means an individual retirement account or individual retirement annuity--
<<end quote>>

After the dashes are a lot of requirements that must be met to qualify as a SEP. But the starting point is that it has to be an individual retirement account or individual retirement annuity. And if it is, then it must be an individual retirement plan as defined in section 7701(a)(37). And if it is, you're permitted to roll it to a Roth IRA by reason of section 408A(e). I guess it would be an exaggeration to call this straightforward, but I don't see any ambiguity here; it seems perfectly clear that you *can* roll a SEP IRA directly to a Roth IRA if you meet the other requirements (modified AGI <= $100,000 and not married filing separately).

I have not spoken to anyone at the IRS about this. But I have posed the question to two pretty knowledgeable persons. One is a Senate staffer working on technical corrections for Roth IRAs, the other works at Treasury and is involved in drafting the "questions and answers" guidance that will come out on this subject. (In the unlikely event there are any non-professionals who read this far I should point out that Treasury and IRS are not synonymous; IRS is an arm of the Treasury.) Both of those individuals agreed without hesitation that a direct roll from a SEP IRA to a Roth IRA is permissible. My hope is that the Q&A guidance will include this item but I can't give assurance on that.

The more interesting question is why, apart from the rush they were in when the drafted the original legislation, will they not permit a direct roll from an employer plan to a Roth IRA? You would have to draft in the appropriate restrictions so the rollover is only permitted in the right circumstances, but it seems to me absurd to require taxpayers to go through the exercise of establishing a regular IRA to receive the rollover and then do another rollover to a Roth IRA. I've tried to convince Senate staff that this is an appropriate change for technical corrections but the response so far is that it isn't "technical" enough, so I'm not optimistic. But I'll keep trying!

KAT in Chicagoland
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information
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<Maybe you can start by telling us what you've learned regarding converting a SEP-IRA directly to a Roth.>

Our tax expert opines that, lacking a specific IRS ruling, it's better, i.e., safer, to perform the IRA two-step: convert the SEP-IRA first to an IRA, then to a Roth IRA. Her view derives from the SEP-IRA too-closely resembling a 401k or other, regular pension plan. Just one woman's opinion (our tax expert's).
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KAT,

<< After the dashes are a lot of requirements that must be met to qualify as a SEP. But the starting point is that it has to be an individual retirement account or individual retirement annuity. And if it is, then it must be an individual retirement plan as defined in section 7701(a)(37). And if it is, you're permitted to roll it to a Roth IRA by reason of section 408A(e). I guess it would be an exaggeration to call this straightforward, but I don't see any ambiguity here; it seems perfectly clear that you *can* roll a SEP IRA directly to a Roth IRA if you meet the other requirements (modified AGI <= $100,000 and not married filing separately).>>

I like that explanation. I hope the IRS does, too. Sometimes things get lost in the translation in their interpretive guidance, though.

Thanks for taking the time to trace through the logic.

Regards…..Pixy

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