Aside from simply wanting to save money for their retirement years, most people participate in some form of retirement savings vehicle, such as an IRA, because they want to improve their tax situation – specifically, they want to pay less income tax. The fact that contributions to a retirement savings vehicle often have a tax deferred status is a primary selling point for IRAs. When you’re thinking about taking money out of an IRA, as in the case of a rollover, you may have questions about how that will affect the tax deferred status of your money. You’ll be relieved to know that the chances you’ll lose the tax deferred status of your money are very slim indeed.
If you have a SEP or Simplified Employee Pension IRA, then you either work for a small business owner or you’re self-employed (or you met one of those conditions in the past). If you have a SEP IRA, you can rollover those funds into almost any kind of IRA – including a traditional IRA – with a few exceptions and qualifications. Those exceptions and qualifications are spelled out by the IRS, and involve Simple IRAs, Roth IRAs, Designated Roth IRAs and 457b plans.
If you’ve already completed your transfer, your funds may have been moved from your SEP IRA in a direct rollover, also known as a trustee-to-trustee transfer. If a trustee-to-trustee transfer took place, chances are you never saw a check, only paperwork. If your transaction was handled as an indirect SEP IRA rollover, then you received a check from your SEP IRA which you deposited or “contributed” to your new IRA. At the end of the tax year, you can expect to receive a 1099-R from the SEP IRA provider, regardless of which transfer method was used.
The amount included in the 1099-R will need to be included in your 1040 Federal Income Tax Return, as all SEP IRA rollovers are considered reportable events to the IRS, although they aren’t necessarily taxable. You should include your 1099-R with your other important financial documents when you deliver them to the person who is preparing your taxes, and tell them about your SEP IRA rollover. If you’re filing your taxes yourself, you need to carefully read and follow the instructions for line 15 of the form 1040.
Your 1099-R should show that no taxes were withheld, because when money from an SEP IRA is rolled over into a new IRA, it is not taxed as income. You’ll need to report the amount of money rolled over (see line 15a), but the amount of tax due should be $0 (see line 15b).
It isn’t until the money from your SEP IRA rollover is withdrawn or distributed from your new IRA, that it will be subject to taxes. If you’re like most people, you’ll wait until you’re at least 59 ½ years old with withdraw any money, when you’ll hopefully have to pay less in taxes than you would have when you earned the money. Withdrawing funds from your SEP IRA rollover account before you meet the minimum retirement age can open you up to additional penalties and taxes.
If you have any further questions about SEP IRA rollovers, know that the IRS provides a wealth of information on their website. You can also frequently find IRS publications at your local public library or post office. There’s nothing, however, the compares with the peace of mind that working with a professional tax preparer or accountant to determine what your best choices are when it comes to SEP IRA rollovers.