How to Convert a SEP IRA to a Roth IRA

If you want to avoid having to pay taxes on the distributions in retirement when you have a simplified employee pension individual retirement account, you have the choice of converting it into a Roth IRA. This can be done regardless of having the pension account whether from an employer or by setting it up yourself.

However, you need to know that you will still have to pay the taxes in the year you convert the account, so converting is usually recommended only if you think you’ll be paying a higher rate when you retire.

Methods of Converting SEP IRA to Roth IRA

SEP IRA can be converted to Roth IRA using rollover or transfer methods. When using the rollover method, you will take a distribution from the SEP-IRA and will have to redeposit the money into a Roth IRA within 60 days.

If you go with the transfer method, you will have to tell a trustee about your SEP IRA to move the money in it directly to your Roth IRA. The transfer method is highly recommended if you wish to avoid the risk of missing on the 60-day deadline and the income tax withholding that comes with a rollover.

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What Are the Resulting Taxes of a Conversion?

When you convert SEP to Roth, it will result in the amount of conversion counting as the taxable income in the year you switched the accounts. The money you contribute to SEP IRA is not taxable, but when you convert it to Roth IRA, which is an after-tax account, you’ll have to pay the taxes.

The money you move to a Roth will be taxed as ordinary income. In other words, the more income you have, the higher your tax rate will be when converted.

What About Tax Reporting?

You will have to report the conversion by filling a form 1040 or form 1040A when you file your tax returns. You will have to show the complete amount as a nontaxable IRA distribution and will have to fill the complete form 8606 in order to find out the taxable portion. You will then have to report the taxable amount which is usually the entire conversion.

Future Distributions

When the money is converted into a Roth IRA, you cannot take qualified distributions of the money and any earnings on it until at least five years have passed from the date of the rollover.

This is a general requirement separate from other requirements for taking the distributions from the account. For instance, if you convert SEP to Roth in 2014, even if you have 59 ½ in 2016, you will still have to wait until the year 2019 to take any qualified distributions.

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Tim Schmidt


Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started this website to share his expertise in using his Self-Directed IRA. Most recently he's been advising individuals to diversify into precious metals ahead of a certain recession. He invested with Goldco.