Technically, the SEP IRA and the traditional IRA are the same type of account. The only difference is that the SEP IRA is allowed to receive employer contributions. Therefore, you can combine the SEP IRA into the traditional IRA without any ramifications. When doing so, move the assets as a (non-reportable) trustee-to-trustee direct transfer.
Converting to a Roth IRA
Whether a conversion to a Roth IRA is good for you depends on your financial profile. In general, if you can afford to pay the taxes that would be due on the conversion—and your tax bracket during retirement will be higher than your tax bracket now—it makes sense to convert your assets to the Roth IRA. That may sound very general, but only someone familiar with your finances could make a specific recommendation. Note, however, that there's a five-year rule for Roth IRA distributions, so also consider your age and how long it will be before you retire before you decide to make the transfer.
At a minimum, you can combine the SEP and traditional IRA to reduce any administrative and trade-related fees that may be charged to the account.
Arie Korving, CFP
Korving & Company LLC, Suffolk, VA
There are two issues to consider. If you roll a SEP IRA into a traditional IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.
If you decide to roll it into a Roth IRA, you will owe income tax on the amount rolled over. However, the money will then grow tax exempt, as there will be no taxes to pay when you begin taking withdrawals.
Be sure to know ahead of time how much you will have to pay in taxes. Also, try to avoid using some of the rollover money to pay the tax, because, depending on your age, it could trigger an early withdrawal penalty.
It’s up to you to decide which option works best. If you are unsure, you may want to consult a financial planner.