SIMPLE IRA Rollovers
A SIMPLE IRA plan may accept rollovers from traditional and simplified employee pension (SEP) IRAs, as well as designated Roth accounts in 401(k) plans; these rollovers must be conducted through direct trustee transfers.
Employer contributions to a SIMPLE IRA vest immediately and have low startup costs, while employers also benefit from tax credits for contributions made towards participants’ accounts.
Eligibility
Employers must ensure all eligible employees can participate in their SIMPLE IRA plan regardless of past contributions or election forms to defer payments, and statements for every year showing employer contributions made directly into SIMPLE IRAs.
If you leave the company that sponsors your SIMPLE IRA, you have two years to transfer its assets before they become subject to taxes and penalties. As this period can vary depending on which provider is used, be sure to discuss its specifics when looking for another custodian.
SIMPLE IRAs differ from 401(k) plans in that all money deposited by employers into your SIMPLE IRA is 100% yours right away – an advantage other retirement accounts such as IRAs cannot offer and is one reason employers choose SIMPLE IRA plans over alternatives like 401(k).
Taxes
SIMPLE IRA withdrawals become tax-free once you reach age 59 1/2; however, the IRS imposes a steep penalty if money is withdrawn before that point; you may avoid this fee if using funds for major unreimbursed medical expenses, qualified higher education expenses or home purchase purposes.
SIMPLE IRAs differ from traditional IRAs in that they can only accept rollovers from other SIMPLE IRAs or traditional employer-sponsored retirement plans, like SEP IRAs or 401(k) plans, while they cannot accept transfers from traditional IRAs or Roth IRAs; furthermore, you must have been an active participant for at least two years in your SIMPLE IRA before rolling it over.
Employers must establish their SIMPLE IRA by October 1 and it operates on a calendar-year cycle. You must provide each employee with a summary description meeting IRS plain-language requirements, detailing information such as eligible employees, compensation levels, contributions made by employer and withdrawal and transfer procedures. In addition, employers should notify any changes to the plan through financial institution notification procedures.
Rollover Options
In general, you can transfer funds from a 401(k) or individual retirement account into a SIMPLE IRA without incurring tax penalties. The IRS provides an interactive rollover chart that makes this easier; simply use it to track how your rollover situation unfolds.
Rollovers between SIMPLE IRAs can also be made, though not between SIMPLEs and traditional IRAs or employer-sponsored retirement plans. This was changed by the Protecting Americans from Tax Hikes Act of 2015 which added a paragraph to IRC Section 408(p), permitting SIMPLEs to accept rollovers from other types of retirement accounts.
Contributions to a SIMPLE IRA vest immediately, unlike many workplace retirement plans. Withdrawals may be made at any time; however, before age 59 1/2 they’ll incur steep penalties due to the two-year rule; withdrawals must wait two years after first joining your SIMPLE IRA before taking place.
Fees
SIMPLE IRAs are similar to 401(k) plans in that employees invest part of their paycheck into an individual investment account and employers may match contributions up to a specified percentage, making these contributions tax deductible while growth occurs tax-deferred until withdrawal.
SIMPLE IRAs offer more than investment options; participants may make non-elective contributions of up to 2 percent of their compensation each year without incurring an employer matching requirement or limit. As the employer matching requirement may change over time, SIMPLE IRAs provide employers and employees with an ideal retirement savings solution that works.
If you plan to roll over a SIMPLE IRA, make sure you reach out to both your current 401(k) plan administrator and the new SIMPLE IRA custodian/trustee to establish how long it will take for the transfer to be complete. Typically, indirect transfers between SIMPLE IRAs must occur within two years or they become taxable and subject to a 25% penalty tax.
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