Sep Ira Conversion

There are various types of IRAs (Individual Retirement Accounts), offering different options for people to save for their retirement. SEP (Simplified Employee Pension) IRA refers to a retirement plan for self-employed individuals and small business owners. Sole proprietors, partnerships and LLCs fall under this category.

The IRA holder is allowed to use the money in his IRA for investment, such as bonds, certificates of deposit,stocks, bonds or mutual funds. Any withdrawal before the age of 59 ½ is subjected to a stipulated penalty.

The contribution limit to a SEP IRA is set at 25% of the individual's earning from employment or USD 49,000, whichever is less. Any withdrawal or distribution from a SEP IRA is generally taxable, with certain exceptions. Once the individual reaches the age of 70 ½ , a mandatory withdrawal is required or else a penalty is imposed.

A ROTH IRA has certain tax advantages over the SEP IRA. Non-taxable withdrawals are allowed after a mandatory holding period of 5 years, as compared with SEP IRA, where each distribution is subjected to tax. There is no compulsory minimum distribution at age 70 ½. However it must be noted that withdrawal before the age of 59 ½ , is similarly subjected to a penalty of 10%.

The money invested in a SEP IRA is tax deductible, and any interest earned is tax free. However distribution at retirement is taxed as income at the current rate. For individuals having large IRAs, it probably makes more sense for a SEP IRA conversion to a ROTH IRA, in which tax is imposed at contribution or conversion point and withdrawal at retirement is tax-free.

Not everyone can qualify for a ROTH IRA. For a SEP IRA conversion to ROTH, the gross income of the individual must be less than USD 100,000. Inherited IRAs (except from a spouse) cannot be converted to a ROTH IRA. If the individual is more than 70 years old and making the required minimum distribution from the SEP IRA, these distributions cannot be converted either.