Small business owners and self-employed individuals use Simplified Employee Pension IRAs as a retirement plan vehicle for themselves and their employees. A SEP IRA behaves like a traditional IRA, except that it's not structured for individuals, and it has a higher contribution limit. Only an employer can contribute and the funds are pre-tax dollars, like a traditional IRA. According to the Internal Revenue Service, you may transfer money to certain other retirement plans without losing the tax-deferred benefits that come with a SEP IRA.
SEP IRA Transfer Basics
The IRS applies traditional IRA rules to SEP IRA transfers. After an employer or you (as an employer or solo practitioner) put money into a SEP IRA, what you choose to do with it is up to you. Employers may not prevent you from transferring or withdrawing funds. You can move SEP IRA money to a traditional IRA, Roth IRA or other qualified vehicle. Assuming you follow IRS rules, you won't incur any penalties when you execute a transfer.
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How Transfers Work
Trustee-to-trustee transfer. According to IRS Publication 590, when you use a trustee-to-trustee transfer, all you do is instruct the trustee of your SEP IRA to send the sum you want to move to another traditional or Roth IRA account.
Rollovers. Alternatively, you can do a rollover by withdrawing the money and depositing it in the new account yourself. You have 60 days from the time you remove funds from the SEP IRA to deposit them in the new account, or the IRS will count the amount as a distribution subject to taxes and perhaps trigger a 10 percent early withdrawal penalty. Also, unless you elect the trustee-to-trustee method, 10 percent of the money normally is withheld for taxes. Tax withholding is optional -- you can tell your SEP IRA trustee not to withhold anything if you wish.
SEP IRA Transfers and Taxes
If you transfer money from a SEP IRA to a traditional IRA or other tax-deferred retirement plan, the funds keep their tax-deferred status, so there are no tax consequences. That isn't the case if you move money to a Roth IRA. Everything that goes into a Roth must be after-tax, so you have to pay income taxes on the pre-tax SEP IRA funds.
All of the money you remove from a SEP IRA for transfer to a Roth must go into the IRA. If you hold out any to pay the taxes, you may be charged a 10 percent penalty. You can use money from other savings to cover the taxes to avoid this penalty.
Restrictions on Transfers
The IRS limits you to one rollover per year as of 2015. Mainly, this applies to moving money into a traditional IRA yourself. The rule does not apply to trustee-to-trustee transfers or to rollovers to a Roth IRA.
Because a SEP IRA is actually a modified traditional IRA, you must start taking required minimum distributions each year starting at age 70 1/2. You can still do transfers to other IRAs. However, you have to make the required minimum distribution first. Only the money that remains after the yearly distribution is eligible for a rollover.