Converting A SEP IRA To A ROTH – What You Need To Know

If you have a simplified employee pension individual retirement account (SEP IRA) then you can avoid having to pay some of the associated taxes in retirement by converting it into a ROTH IRA. It doesn’t matter whether the pension account in question was set up by you or your employer – you are free to make the switch if you think it’s the right option for you.

Naturally, you will still have to pay some of the tax associated with the account; you will pay this in the year in which you make the account conversion. As a result, it is generally recommended that only those savers who are expecting to pay a higher rate when they retire consider making the switch.

If you think that converting a SEP IRA to a ROTH might be a good move for you to make financially, here’s everything that you need to know beforehand.

Conversion Methods

Upon converting a SEP to a ROTH, the amount of conversion will be added to your taxable income for the financial year. Money that you put into a SEP IRA is tax-exempt, but upon converting it into ROTH IRA, you become liable for the associated tax.

Any money that you move into a ROTH will then be taxed just like any other income. This means that you will pay tax proportional to your income when you make the conversion.


If you decide to go ahead with converting your account, you will need to report the conversion to the IRS using the appropriate form. In this case, you need to fill in form 1040 or 1040a when you file your tax returns in the year that you make the conversion.

You will have to let the IRS know what the total amount is, which will be shown as a non-taxable IRA distribution. You then need to complete another form, form 8606, which will let you work out what portion of the amount is taxable. In most cases, the taxable amount will be equal to the entire conversion amount.

Future Distributions

Once you have converted your money into a ROTH IRA, you will no longer be able to take qualified distributions of the money. You will also be unable to take out any earnings on it until a period of at least five years has passed from the date of the rollover. This is a general requirement and is separate from any other requirements on the account with regards to taking distributions out.

Before you commit to any financial move or investment, it is vital that you know exactly what you are doing and why. If you hold a SEP IRA but don’t know where making the conversion is the right option for you then you should consult with a qualified financial advisor. A financial advisor can assist you in making all the important decisions in your financial life and will help you to avoid the many pitfalls that trip up inexperienced investors. If you are certain that converting your SEP IRA to a ROTH is the right move to make, then make sure you research the process carefully beforehand.