For self-employed staff and small enterprise house owners, the SEP IRA provides a versatile and tax-deferred option 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 may be surprisingly fragile. One small misstep can unravel years of cautious planning and hand the IRS an sudden payday.

A SEP IRA rollover is not only 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 widespread rollover errors which have turned many SEP IRAs right into a monetary nightmare.

Lacking the 60-Day Rollover Window

Timing is every thing in the case of rolling over your SEP IRA. In case you obtain a distribution and don’t deposit it into one other certified retirement account inside 60 days, the IRS considers it earnings. Which means all the steadiness you supposed to roll over could possibly be taxed as abnormal earnings, and when you’re below age 59½, you possibly can be hit with a ten% early withdrawal penalty as properly.

Many buyers 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 option 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 transfer 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 test in your identify as a substitute of doing a trustee-to-trustee switch, you’re all of a sudden on a really tight timeline. Worse, when you’ve already carried out one rollover prior to now 12 months, you possibly can be violating the IRS’s one-rollover-per-year rule, triggering much more tax penalties.

All the time request a direct switch when you’re not completely certain 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 mechanically withhold 20% for taxes. Right here’s the kicker: although the IRS acquired its reduce, you’re nonetheless answerable for rolling over the complete quantity of your authentic distribution, not simply what you acquired.

Say you have been rolling over $20,000 and solely acquired $16,000 after withholding. In case you don’t give you the lacking $4,000 out of your individual pocket and deposit the complete $20,000 into the brand new account, the IRS will deal with that $4,000 as a taxable distribution. It sounds absurd, nevertheless it’s a mistake that catches folks off guard on a regular basis.

And when you withhold an excessive amount of since you’re not sure of the principles? It’s possible you’ll be ready till tax season for a refund on cash that was by no means alleged to be taxed within the first place.

Violating the One-Rollover-Per-Yr Rule

This little-known IRS rule journeys up even savvy buyers. You possibly can solely full one rollover between IRAs of the identical kind inside a 12-month interval. That rule applies to SEP IRAs, too, since they’re thought-about conventional IRAs for rollover functions.

In case you attempt to do a number of rollovers in a yr—say, shifting funds between a number of custodians—you possibly can unknowingly invalidate the transaction. The end result: 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 shifting funds between custodians. These don’t rely towards the one-rollover rule and received’t set off the identical restrictions or penalties.

Not Reporting the Rollover Correctly on Your Taxes

Even when every thing goes easily, you continue to should report your rollover appropriately in your tax return. The IRS receives a 1099-R for each distribution, even when you instantly roll over the cash into one other retirement account. In case you don’t correctly report the rollover utilizing Kind 1040 and presumably Kind 5498, the IRS might imagine you merely took a taxable distribution.

This results in irritating notices, delayed refunds, and time-consuming explanations. Worse, when you ignore or mishandle these notices, the IRS may assume the distribution was taxable and demand fee, 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 earnings.

These Errors Are Avoidable

Rolling over your SEP IRA must 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 complex IRS guidelines. One flawed assumption can set off hundreds in taxes and penalties that you just by no means noticed coming.

In case 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 sudden 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 and marketing to popular culture, she’s written about every thing below the solar. When she’s not writing, she’s spending her time outdoors, studying, or cuddling along with her two corgis.