Can I Roll My SEP IRA Into a Traditional IRA, or Convert to a Roth?

A simplified employee pension (SEP) IRA is a retirement savings plan established by employers—including self-employed people—for the benefit of their employees and themselves. Employers may make tax-deductible contributions on behalf of eligible employees to their SEP IRAs.

SEPs are advantageous because they are easy to set up, have low administrative costs, and allow an employer to determine how much to contribute each year. SEP IRAs also have higher annual contribution limits than standard IRAs.

Key Takeaways

  • SEP IRAs are qualified retirement accounts set up by small businesses that allow for employer contributions and larger contribution limits than conventional ones.
  • Rolling a SEP account into a traditional IRA is fairly straightforward since both are treated the same by the IRS using pre-tax dollars.
  • Converting to a Roth may trigger a taxable event, as well as other restrictions on Roth accounts that must be considered.

Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions. One major benefit of a SEP IRA is employer contributions are vested immediately.

However, sometimes you might need to roll your SEP into a different qualified account—for instance, if you change jobs or the employer goes out of business.

Converting to a Traditional IRA

Technically, the SEP IRA and the traditional IRA are the same type of account, for tax purposes. The only difference is that the SEP IRA is allowed to receive employer contributions while a traditional IRA only individual contributions. So you can combine the SEP IRA into the traditional IRA without any ramifications, except for who is allowed to contribute. When doing so, move the assets as a (non-reportable) trustee-to-trustee direct transfer. Converting to a Roth IRA can be a bit trickier.

Converting to a Roth IRA

Whether a conversion to a Roth IRA is good for you depends on your financial profile. In general, if you can afford to pay the taxes that would be due on the conversion—and your tax bracket during retirement will be higher than your tax bracket now—it makes sense to convert your assets to the Roth IRA.

That may sound very general, but only someone familiar with your finances could make a specific recommendation. Note, however, that there's a five-year rule for Roth IRA distributions, so also consider your age and how long it will be before you retire before you decide to make the transfer.

At a minimum, you can combine the SEP and traditional IRA to reduce any administrative and trade-related fees that may be charged to the account.

Advisor Insight

Arie Korving, CFP
Korving & Company LLC, Suffolk, VA

There are two issues to consider. If you roll a SEP IRA into a traditional IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax-deferred until you begin taking withdrawals.

If you decide to roll it into a Roth IRA, you will owe income tax on the amount rolled over. However, the money will then grow tax-exempt, as there will be no taxes to pay when you begin taking withdrawals.

Be sure to know ahead of time how much you will have to pay in taxes. Also, try to avoid using some of the rollover money to pay the tax, because, depending on your age, it could trigger an early withdrawal penalty.

It’s up to you to decide which option works best. If you are unsure, you may want to consult a financial planner.

Article Sources
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  1. Internal Revenue Service. "Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Pages 5, 7.

  2. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  3. Internal Revenue Service. "SEP Plan FAQs," Select "Contributions."

  4. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)," Select "Choose a SEP Plan."

  5. Internal Revenue Service. "Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)," Page 8, 21-22.

  6. Internal Revenue Service. "Notice 2009-75, Rollovers from Employer Plans to Roth IRAs," Page 5.

  7. Internal Revenue Service. "Publication 590-B, Contributions to Individual Retirement Arrangements (IRAs)," Page 31.

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