Although both an SEP, which is an IRA-based workplace retirement plan, and an IRA give you tax deferral, they aren't the same beast. After leaving your job, an IRA can give you nearly unlimited investment options, instead of only those offered through your SEP. You have two main choices when rolling over your SEP to an IRA. You may roll it to a traditional IRA and continue to get tax-deferred growth on your money until retirement. You are also allowed to roll your SEP to a Roth IRA by paying income taxes on the total value up-front, and then you'll receive tax-free growth on your retirement dollars.
Calculate whether it's more attractive for you to use a traditional, or a Roth IRA. Many tools available on the internet can help you determine if using a Roth IRA and paying the tax now -- so it grows tax-free -- is better than choosing a traditional IRA and deferring tax payments until retirement. The math generally favors younger people using a Roth IRA, and those closer to a retirement sticking with a traditional IRA. If you decide to roll your SEP to a Roth, you'll also want to set up a tax fund, so you'll have money to pay the income tax due at tax time.
Call your SEP provider to determine what fees you're going to pay when rolling your SEP to an IRA. Many plans have no exit fees, but some mutual funds have back-end charges during your first few investment years. Annuity-based SEP plans might have surrender fees to rollover your funds to an IRA. It's a good idea to ask about fees, to avoid getting surprised by charges levied against you during the process.
Open an IRA for your SEP rollover money. If you prefer to research and invest without help, focus on discount or online brokerages to save on trading commission fees. If retirement planning isn't for you, or you're not confident without a professional in your corner, ask friends for referrals to good full-service brokers or advisers. Before settling on an adviser, check their employment history and complaint file on the Financial Industry Regulatory Authority BrokerCheck website.
Ask your IRA company for the appropriate rollover forms to move your funds from your SEP. A full-service broker will facilitate this process and point you to the appropriate forms. If you're working with an online or discount broker, check their website for rollover paperwork. SEP plan rollover forms should be with 401k rollover forms, and in many cases are the same document. Follow up with your broker after submitting paperwork, to see if there is anything else you need to do. Usually your money will arrive in a couple of weeks.
File IRS forms correctly at tax time to complete your SEP rollover. Your SEP company will send a 1099-R detailing your disbursement from the plan. Focus on Box 7 of the form to find the letter "G". This relays to the IRS that your money was legally rolled to an eligible retirement plan, and no tax is due. Fill the amount of your rollover in line 12a if you file Form 1040A, or line 16A if you use Form 1040. Place a "0" in line 12b for Form 1040A or 16A if you use Form 1040, showing that you transferred the entire amount to your IRA. Write "rollover" next to this line on the tax document.
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.