IRA Types

• To learn more about how combining IRAs works, it's important to understand how they are taxed. There are several types of IRAs, but each of them falls into one of two categories: pre-tax accounts and after-tax accounts. Both traditional and SEP IRAs are types of pre-tax accounts: the Internal Revenue Service lets you deduct your contribution from your income and delay taxes on earnings your account accrues. Withdrawals are taxed at your income tax rate. Roth IRAs are known as after-tax accounts because you can't deduct your contribution from your income. Withdrawals, however, are tax free.
  
  

SEP and Traditional IRA

• Combining SEP and traditional IRAs is a simple matter because they are essentially the same kind of account. The only difference is how much the IRS allows you to contribute. As of 2010, people under 50 can contribute $5,000 to a traditional IRA; those over 50 can contribute $6,000. The contribution limits for a SEP IRA are the lesser of 25 percent of your income or $49,000. Other than that, all the rules are the same. Transfers between SEP and traditional IRAs are tax and penalty free.
  
  

SEP and Roth IRA

• You owe the IRS income taxes on amounts you roll over from a SEP IRA to a Roth IRA. This is because you took a tax deduction for amounts you contributed to a SEP IRA, but do not receive a deduction for amounts you contribute to a Roth IRA. The year you make the conversion, you must add amounts you converted from your SEP IRA to a Roth IRA to your income. If converting your entire SEP IRA would bump you into a higher tax bracket, you could convert only a portion of the account instead.
  
  

Function

• To actually move amounts from one account to another, you have a few options. If you have both a SEP IRA and a Roth or traditional IRA with the same trustee, you can ask your representative to combine the accounts. If the accounts are at different institutions, you can fill out paperwork with one trustee and request an asset transfer to the institution that maintains your other account. This is called a direct transfer. You can also withdrawal the money from one account yourself and deposit it at a new institution within 60 days, a process known as an indirect transfer.
  
  

Considerations

• If you request a direct transfer of funds from one trustee to another, there is no withholding involved. The money is transferred electronically and never passes through your hands. If you make a 60 day rollover, however, the IRS requires your trustee to withhold 20 percent of your funds. To avoid a 10 percent early withdrawal penalty, you must redeposit 100 percent of your funds. Therefore, you must come up with 20 percent of the transfer out of pocket in the short term; you'll get the money back at tax time.