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I have a SEP IRA with about 125k in it and I'm thinking of rolling it into a Roth so that I can have ready access to the money if I need it before age 59.5 (i.e. I'd like to keep my FIRE options open). My understanding is that

  • I have to pay the taxes on the rolled over funds in the year I roll them over (but I'd rather not take the entire tax hit at once)
  • I can't access the rolled over funds without penalty for five years
  • I can only do one rollover (total across all accounts) each year

Assuming it doesn't bump my tax bracket, I'm wondering if there are any downsides to doing a partial rollover of about ~$20k per year for the next 6 or 7 years (I'm assuming there'll be some growth in there too).

I'm also wondering whether I need to have a separate Roth for each year's rollover so there's no question in year 7 if I withdraw money that I'm pulling year 1's money and not year 6's.

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I can only do one roll over (total across all accounts) each year.

Might not be relevant, but I'm pretty sure this is not the case. It would only be true if you got a check from your SEP IRA provider made out directly to you.

From https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions:

The [IRA rollover] one-per year limit does not apply to:

  • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

Your second question:

I'm also wondering whether I need to have a separate Roth for each year's roll over so there's no question in year 7 if I withdraw money that I'm pulling year 1's money and not year 6's.

No, you don't need separate Roth accounts unless you really want to. Your rollovers will count toward a rollover/conversion basis. They are withdrawn in first-in/first-out order, and as long as the rollover/conversion occurred 5+ years ago, there is no tax or penalty.

Lastly, ensure doing a taxable rollover makes sense. If your marginal tax rate will drop considerably in retirement, it's possible you'd be better off just withdrawing directly and paying the 10% early withdrawal penalty.

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