Yes. The SEP IRA is just a traditional IRA that receives employer SEP contributions, and it operates by the same rules.

But let's clarify our terms first. A traditional individual retirement account (IRA) is a long-term savings plan that allows a person or couple with taxable income to invest a portion of annual gross income up to a set maximum each year. The account holder receives a tax deduction for the contribution amount in that year, and the money is not taxed as it accrues from year to year. When the account owner retires and starts taking money out, it is taxable as ordinary income.

A Self-Employment Plan (SEP) IRA is a variation that is designed for freelancers and small business owners with at least one employee. Unlike a traditional IRA, an employee cannot contribute to the fund. But the employer may contribute to an employee's fund as well as to his or her own fund.

Key Takeaways

  • A SEP IRA is a type of traditional IRA designed for freelancers and small business owners.
  • As with any traditional IRA, you can convert the account to a Roth IRA.
  • Just remember, you'll owe income taxes for that tax year on the entire balance.

The SEP IRA is intended to be easy to set up and flexible to use. For example, an employer can decide at the end of the year whether to make a contribution and how much. However, the employer cannot contribute only to their own fund but must make a contribution to any eligible employees' funds as well.

Understanding the SEP IRA

Like a traditional IRA, a SEP IRA can be opened at just about any bank, financial institution, personal investing firm, or online trading platform. A variety of investment options are available, from conservative bond funds to aggressive growth stock funds.

However, SEP IRAs are special accounts in that they are endorsed by the Internal Revenue Service (IRS) as a retirement savings vehicle with federally-approved tax benefits.

To convert a SEP IRA, contact the financial institution that manages the money. You can roll over the money there or at any other company that offers IRAs.

The IRA is, by definition, a tax-deferred savings vehicle. There are benefits to you and your employees. Taxes on money contributed to the account are delayed until the money is withdrawn, presumably after retirement. Your taxable income, and that of your employees, is reduced for that year.

In other words, the tax hit on the owner's net income or profit is less than it would have been, had the contributions been deposited into a non-IRA savings account. Also, there are no taxes on the interest earned or investment gains over the years. The only time taxes are due is when the money is withdrawn.

Converting a SEP IRA to a Roth IRA

A traditional IRA is called "traditional" to distinguish it from the other main type of IRA, the Roth. A Roth IRA has one main difference from a traditional IRA—the taxes are paid upfront. That is, you pay in after-tax earnings, getting no immediate tax deduction. But you never owe taxes on that money again, meaning there are no taxes on the principal, earnings over the years, nor on the distributions or withdrawals after the age of 59½.

Taxes Owed Upon Conversion

However, when you convert any traditional IRA, including a SEP IRA, to a Roth account, you owe taxes on the balance in that tax year. This can be a sound retirement planning strategy, if you can afford to pay the taxes now instead of owing them later, in retirement. This is especially true if you expect to be in a higher tax bracket after you retire.


Another benefit of the Roth IRA is that you will not be required to make minimum annual withdrawals—called required minimum distributions (RMDs)—as with a traditional IRA.

Early-Withdrawal Penalties

The Roth IRA has exceptions to avoid early withdrawal penalties, meaning a distribution before the age of 59½. If the money is withdrawn before 59½, the IRS typically imposes a 10% tax or penalty on the distribution amount in addition to the income taxes owed, which is the same penalty for the traditional IRA.

However, the Roth has exceptions to the early withdrawal penalties—called qualified distributions. There will be no penalty if the money is used in specific circumstances, including buying your first home, you've become permanently and totally disabled, certain higher education expenses, and medical insurance premiums during a period of unemployment.

How to Convert a SEP into a Roth IRA

In order to convert to a Roth IRA, contact the financial institution that manages your SEP or other traditional IRA account. In IRS-speak, this is the trustee for the account. You can roll over the money into a Roth account at that institution or somewhere else if you choose.

In any case, make sure you request a rollover. You do not want that money paid directly to you, meaning a check made out to your name. Instead, consider having the check made payable to the new IRA account for the benefit of (FBO) you. However, if you've been paid directly via a check and don't redeposit the check into an IRA within 60 days, it'll count as a distribution, and you'll pay taxes and early withdrawal penalties if you're under the age of 59½.

Instead, you want the institution to transfer the funds to the Roth IRA directly without you receiving any money so that you won't be taxed, nor will you have any penalties. This is what the IRS calls a trustee-to-trustee transfer since the financial institution holding your IRA makes the payment directly from that IRA to the financial institution holding the new Roth IRA.