Can a SEP-IRA Convert to a Roth?

by W D Adkins

A SEP IRA gives you a tax deduction for the money you contribute to the account. By contrast, although you do not get a tax break for contributions, all the money you withdraw from a Roth IRA once you reach age 59 1/2 is tax free. For many people, this means there is an advantage to shifting funds from a SEP IRA to a Roth.


A simplified employee pension (SEP) IRA is a tax-deferred retirement plan. This means you don’t pay income taxes on the money you or your employer contributes to a SEP IRA. Contributions and investment earnings are not taxed until they are withdrawn from the account, at which time they are subject to ordinary income taxes. In addition, if money is withdrawn from a SEP IRA before you turn 59 1/2 years old, you normally pay a 10 percent penalty tax. Employers can contribute up to 25 percent of your salary to a SEP. If you set up a SEP as a self-employed individual, you can contribute up to 20 percent of your net earnings. In either case, the maximum annual contribution is $49,000.


Once money is contributed to a SEP IRA, it is yours. In addition, SEP IRAs follow the same rules as traditional IRAs. This means you can convert money in a SEP IRA to a Roth at any time. At one time, you could not transfer funds from another retirement plan into a Roth if your adjusted gross income was over $100,000. This restriction no longer applies. You will have to pay the income taxes on the transferred funds that would have been levied had you left the money in the SEP IRA until you retired.


There are three ways to convert (move) money from a SEP to a Roth IRA. Before you start, open the Roth IRA if it isn’t already set up. Method one is to have the trustee of the SEP IRA issue a check made out to the Roth IRA (not to you personally). Make sure the money is deposited in the Roth account within 60 days after it is withdrawn from the SEP account. The second method is a trustee-to-trustee transfer of the assets in the SEP directly to the Roth IRA account. The third method is a same trustee transfer. Essentially, this is a trustee-to-trustee transfer when the Roth account is with the same financial institution as the SEP IRA.

Tax Issues

When you convert SEP IRA money to a Roth IRA, you must pay income taxes. However, as a general rule you don’t want to use SEP IRA funds for this purpose unless you are at least 59 1/2 years old. The reason is that you will pay the 10 percent penalty tax on funds you use to pay the taxes. Only the money actually placed in the Roth doesn’t incur the penalty. The best thing to do is pay the taxes out of a checking or savings account. There is one exception. If you have sufficient funds in the Roth IRA that may be withdrawn without penalty, you can use that money to pay the taxes on the conversion funds without incurring the penalty tax.

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