SEP IRA 60-Day Rollover: What Are the Rules?
Understand the requirements for a SEP IRA 60-day rollover, including the strict deadline and once-per-year rule, to maintain its tax-deferred status.
A Simplified Employee Pension (SEP) IRA is a retirement account for self-employed individuals and small business owners that allows for flexible contributions. When you need to move these funds, such as when changing financial institutions, a 60-day rollover allows you to transfer money to another retirement account without immediate taxes or penalties. This process involves receiving the funds directly before depositing them into a new account within the required timeframe.
Understanding the 60-Day Rollover Rule
A 60-day rollover is an “indirect” rollover because the funds are paid directly to you instead of being transferred between financial institutions. The 60-day period to complete the rollover begins on the day you receive the distribution from your SEP IRA. If this deadline is missed, the entire withdrawal is considered taxable income for that year.
The once-per-year rollover rule limits you to one indirect IRA-to-IRA rollover within any 12-month period. This limitation applies to all of your IRAs combined, including SEP, Traditional, and SIMPLE IRAs, not on a per-account basis. For example, if you complete a 60-day rollover from a Traditional IRA, you cannot perform another from your SEP IRA for the next 365 days.
This differs from a trustee-to-trustee transfer, where funds move directly between financial institutions without you taking possession. Direct transfers are not subject to the once-per-year limitation or the 60-day deadline, making them a less risky option for moving retirement funds. The 60-day rollover provides more control but carries a higher compliance risk.
The Rollover Process Step-by-Step
To initiate a 60-day rollover, contact the financial institution holding your SEP IRA and request a distribution. The institution will issue a check made payable directly to you.
The 60-day clock starts when you receive the funds. You must deposit the full amount you withdrew into the new retirement account, which can be another SEP IRA or a Traditional IRA. If the original institution withheld taxes from the distribution, you must use your own funds to make up the difference for a full rollover. For instance, if you withdraw $20,000 and $4,000 is withheld for taxes, you receive $16,000 but must deposit the full $20,000.
When depositing the funds, inform the new financial institution that it is a “rollover contribution.” This ensures the deposit is coded correctly and not treated as a regular annual contribution, which could lead to excess contribution issues.
You must report the rollover on your annual tax return. The distributing institution will send you a Form 1099-R showing the total distribution. On your Form 1040, you report the total distribution amount but enter $0 as the taxable amount, indicating it was a rollover.
Consequences of a Missed Deadline
Failing to deposit the funds within the 60-day window has immediate tax implications. The entire distribution becomes taxable as ordinary income in the year of the withdrawal. For example, a $50,000 failed rollover for someone in the 24% tax bracket would result in $12,000 in federal income tax. If the account holder is under age 59½, an additional 10% early withdrawal penalty of $5,000 would also apply.
The IRS provides relief for a missed deadline through a self-certification procedure. This allows you to make a late rollover without advance IRS approval if you meet one of several specific conditions, including:
- Errors made by the financial institution
- A misplaced and uncashed distribution check
- Funds deposited into an account you mistakenly believed was a retirement plan
- Postal errors
- Severe damage to your home
- Death of a family member
- Serious illness affecting you or a family member
- Your incarceration
- Restrictions imposed by a foreign country
- A distribution made on account of an IRS levy
- Delays in receiving information from the distributing company
To use this option, you provide a written letter to the receiving financial institution, certifying that you missed the deadline for one of the valid reasons. The institution can then accept the contribution as a valid rollover. Self-certifying is not an automatic waiver and is subject to IRS review during an audit.
For situations not covered by self-certification, a taxpayer can apply for a Private Letter Ruling (PLR) from the IRS to request a waiver of the 60-day rule. The PLR process is complex and involves a user fee that can be $10,000 or more. This option is reserved for unusual circumstances where self-certification does not apply.