Can I roll my SEP IRA into a Traditional IRA or should I convert to a Roth?
You can roll an SEP into an IRA. If you have multiple IRAs and won't make any further contributions to a SEP, this simplifies management and record keeping. If it is your only IRA, why bother?
It can be converted to a ROTH if you pay the taxes on the value. Generally, Roth conversions are attractive if you can do it at a tax rate that you think will be lower than the one you will pay on the withdrawals in the future.You can also pay the tax from outside resources.
Technically, the SEP IRA and the Traditional IRA are the same type of account. The only difference is that the SEP IRA is allowed to receive employer contributions. Therefore, you can combine the SEP IRA into the Traditional IRA without any ramifications. When doing so, move the assets as a (nonreportable) trustee-to-trustee transfer.
Whether a conversion is good for you depends of 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, then 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.
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.
For more insight, read The Simple Tax Math Of Roth Conversions.
There are two issues to consider when answering your question. If you roll an SEP into a regular or rollover 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 since 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 and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – depending on your age.
It’s up to you to decide which option works best for you. If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.
To convert or not to convert is a question that depends on your current tax status and future goals. Because of overwhelming advantages that Roth can offer (under the current tax code), I usually suggest Roth. However, it may not work for anyone and everyone.
For example, if you’re currently in the 33% or higher tax bracket, by converting the SEP to a Roth lump-sum, it may push you to an even higher tax bracket. Moreover, based on your estimate that your retirement tax bracket may be, say 25%, the conversion is obviously not beneficial to you-to pay a higher current tax for a lower future tax benefit. You want the opposite, paying a lower tax at the present time and taking out the tax-free money at the retirement when your rate could be high.
Here’s another consideration. By not converting the SEP to Roth, you may not be able to do the two-step conversion like many high income earners can do each year. Why? You can’t cherry pick the amount you want to convert to Roth. You must have a clean slate to do the Roth conversion each year, which means the only time you have the traditional IRA is for the purpose of the conversion. For instance, assume you make the lump-sum SEP conversion to a Roth this year. Starting 2017, you do not have any types of traditional IRA. That’s when you set up a non-deductible traditional IRA, fully fund it, and immediately convert to Roth. The same cannot be true if you have a SEP or any other traditional IRA with a $10K balance. You need to do a pro-rata calculation to figure it out how much of the new contribution can be converted to Roth without paying tax.
I know it’s complicated, and that’s why you need to consult with a CFP® to make sure. Best!
Yes you can Roll as SEP IRA into a Traditional, but you may have to wait until you are done working for the SEP company. This type of rollover would be a non taxable event.
Rolling into a Roth is a totally different decision. First, you will owe income taxes on the amount that you convert. Depending on your tax bracket this may or may not be warranted.