For self-employed employees and small enterprise homeowners, the SEP IRA presents a versatile and tax-deferred method to save for retirement. However when it’s time to maneuver these funds, whether or not to consolidate accounts, retire, or change custodians, the method might be surprisingly fragile. One small misstep can unravel years of cautious planning and hand the IRS an surprising payday.
A SEP IRA rollover isn’t just a monetary transaction. It’s authorized and ruled by a strict set of IRS guidelines. Failing to know or observe them can set off penalties, taxes, and even disqualification of your account’s tax-advantaged standing. That can assist you keep away from expensive surprises, listed below are 5 frequent rollover errors which have turned many SEP IRAs right into a monetary nightmare.
Lacking the 60-Day Rollover Window
Timing is all the pieces relating to rolling over your SEP IRA. Should you obtain a distribution and don’t deposit it into one other certified retirement account inside 60 days, the IRS considers it revenue. Which means the complete stability you meant to roll over could possibly be taxed as extraordinary revenue, and in the event you’re beneath age 59½, you would be hit with a ten% early withdrawal penalty as properly.
Many traders make this error after they’re between custodians or ready on paperwork. However the IRS doesn’t care about delays, even when they’re not your fault. Until you qualify for a uncommon hardship waiver, lacking the 60-day mark is a surefire method to lose your tax deferral and owe a hefty invoice.
Complicated a Rollover With a Switch
A rollover entails you taking possession of the cash, if solely briefly, whereas a direct switch sends the funds from one account to a different with out you touching them. The excellence issues. Rollovers include a 60-day deadline and IRS reporting necessities. Transfers don’t.
Whenever you request a rollover however don’t notice the custodian has issued the verify in your identify as a substitute of doing a trustee-to-trustee switch, you’re instantly on a really tight timeline. Worse, in the event you’ve already completed one rollover up to now 12 months, you would be violating the IRS’s one-rollover-per-year rule, triggering much more tax penalties.
All the time request a direct switch in the event you’re not completely positive what the method entails. It’s the safer, cleaner route that avoids pointless threat.
Failing to Withhold Taxes Or Withholding Too A lot
In case your SEP IRA custodian sends the funds on to you in a rollover, they could routinely withhold 20% for taxes. Right here’s the kicker: although the IRS obtained its minimize, you’re nonetheless liable for rolling over the total quantity of your authentic distribution, not simply what you acquired.
Say you have been rolling over $20,000 and solely obtained $16,000 after withholding. Should you don’t provide you with the lacking $4,000 out of your personal pocket and deposit the total $20,000 into the brand new account, the IRS will deal with that $4,000 as a taxable distribution. It sounds absurd, however it’s a mistake that catches folks off guard on a regular basis.
And in the event you withhold an excessive amount of since you’re uncertain of the foundations? You could be ready till tax season for a refund on cash that was by no means speculated to be taxed within the first place.
Violating the One-Rollover-Per-12 months Rule
This little-known IRS rule journeys up even savvy traders. You’ll be able to solely full one rollover between IRAs of the identical sort inside a 12-month interval. That rule applies to SEP IRAs, too, since they’re thought-about conventional IRAs for rollover functions.
Should you attempt to do a number of rollovers in a 12 months—say, transferring funds between a number of custodians—you would unknowingly invalidate the transaction. The outcome: your rollover is handled as a taxable withdrawal, and any extra rollovers are disallowed.
To get round this, use direct trustee-to-trustee transfers when transferring funds between custodians. These don’t depend towards the one-rollover rule and gained’t set off the identical restrictions or penalties.
Not Reporting the Rollover Correctly on Your Taxes
Even when all the pieces goes easily, you continue to should report your rollover accurately in your tax return. The IRS receives a 1099-R for each distribution, even in the event you instantly roll over the cash into one other retirement account. Should you don’t correctly report the rollover utilizing Kind 1040 and probably Kind 5498, the IRS might imagine you merely took a taxable distribution.
This results in irritating notices, delayed refunds, and time-consuming explanations. Worse, in the event you ignore or mishandle these notices, the IRS might assume the distribution was taxable and demand cost, plus curiosity and penalties.
Working with a tax advisor may help make sure the rollover is recorded correctly and that you just’re not overreporting or underreporting your revenue.
These Errors Are Avoidable
Rolling over your SEP IRA needs to be a strategic transfer, not a monetary entice. However the course of is way from foolproof, particularly with obscure paperwork, inconsistent custodian insurance policies, and sophisticated IRS guidelines. One unsuitable assumption can set off 1000’s in taxes and penalties that you just by no means noticed coming.
Should you’re planning to roll over your SEP IRA or have already got, take a second have a look at the steps you took and the paperwork you submitted. The time to repair a mistake is earlier than the IRS comes calling.
Have you ever ever tried a rollover and run into complicated guidelines or surprising penalties?
Learn Extra:
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Riley is an Arizona native with over 9 years of writing expertise. From private finance to journey to digital advertising to popular culture, she’s written about all the pieces beneath the solar. When she’s not writing, she’s spending her time exterior, studying, or cuddling along with her two corgis.
