A SEP IRA is a type of retirement account designed for use by small businesses and the self-employed. It functions much like a traditional IRA but allows employer contributions to the IRA fund. Though contributions to a SEP IRA are tax-deductible, you have to pay taxes on each distribution you take when you reach retirement age. Depending on your retirement goals, you may prefer to have a Roth IRA instead; Roth IRAs don't allow you to deduct your contributions, but they do offer tax-free distributions. If this sounds appealing, you can convert your SEP to a Roth IRA.
Check your eligibility. You can't convert your SEP IRA to a Roth IRA if you filed your taxes as "Married Filing Separately" unless you and your spouse were separated for the full year, and you can't convert it if your adjusted gross income was more than $100,000. You also can't convert an inherited SEP IRA that came from anyone except your spouse. If you qualify to convert a traditional IRA, you'll qualify to convert your SEP IRA.
Open a Roth IRA account. You can open the account at the same bank or brokerage where your SEP IRA is held, or you can choose a different custodian if you find a better deal. When opening the account, specify that it will be funded by an incoming transfer or rollover from an existing IRA. You'll need to wait until your Roth IRA account is opened before you can begin the transfer from your SEP IRA.
Visit the bank or brokerage where your SEP IRA is held. Talk to a teller or broker and let him know that you want to convert your SEP IRA and transfer its funds to the Roth IRA account you've created. You'll need to identify yourself as the account holder, and you'll be given a transfer form to fill out.
Fill out the transfer form, choosing "rollover" as the transfer type. You'll need to roll over the entire amount held in the SEP IRA, depositing it into the Roth IRA account. You can have the rollover distribution mailed to you in check form if you want, but it's easier to use an electronic funds transfer to move the money from the SEP to the Roth account. Inform the person who processes your transfer request that you want to close the SEP IRA account once the transfer is complete.
Contact the bank or brokerage where you opened the Roth IRA to see if the funds transfer has completed. If you used the same institution that held the SEP IRA, the rollover should occur quickly, but if you chose a different custodian, it may take a few business days for the money to go through.
Pay your taxes. The rollover from your SEP IRA is considered a distribution from the account, meaning you'll have to pay taxes on it. You'll receive Form 1099-R from the custodian of your IRA or in the mail so you can include the distribution on your taxes for the year.
Items you will need
- Driver's license or other form of identification
- SEP IRA account information
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