SIMPLE IRA Rollovers
ERISA consultants regularly receive calls from financial advisors with questions related to SIMPLE IRA rollovers.
Your SIMPLE IRA may only be rolled over after two years of participation and any distributions before this point will be subject to taxes (unless over age 59 1/2) as well as an additional 10% penalty fee.
Can I roll over my SIMPLE IRA to a Roth IRA?
If you choose a SIMPLE IRA plan, if your circumstances or retirement savings strategy change you have several options when withdrawing or changing course. Withdraw your funds or transfer them over to another type of IRA. However, depending on your age and time spent with SIMPLE IRA you may be subject to both income tax and penalty tax payments upon withdrawal before age 59 1/2.
Even though SIMPLE IRAs provide many advantages, it is essential to understand their restrictions and limitations. These include lower contribution limits than other retirement account options like 401(k), as well as stringent rules requiring employees to wait two years before withdrawing any money from their plan and incurring an early distribution penalty of 10% if making withdrawals within those first two years.
Can I roll over my SIMPLE IRA to a 401(k) plan?
SIMPLE IRA plans provide smaller administrative burdens and lower contribution limits than 401(k) plans, making them suitable for small businesses that do not employ many employees.
To be eligible to join a SIMPLE IRA plan, an employee must have been with their employer for at least two years and plan on working there for at least as long this year. Furthermore, employers with 100 or fewer employees cannot have another retirement plan such as 401(k)s or SEP IRAs in place.
Employees converting from a SIMPLE IRA to a 401(k) must wait two years before reinvesting tax-free into another account, both trustee-to-trustee transfers and direct rollovers. Failure to meet this requirement could force high income earners to include distributions as income – an error which could prove costly in terms of income tax liabilities.
Can I roll over my SIMPLE IRA to an employer-sponsored plan?
If a participant wants to roll over their SIMPLE IRA after leaving an employer and before two years have passed since making their initial contribution, then they must do it before that deadline has expired. This rule exists because withdrawing before two years has passed could incur a penalty tax of up to 25% for withdrawing early from their plan.
One reason people choose direct rollovers when leaving a SIMPLE IRA is that it offers them more retirement savings options with the same company, including contributing directly. Another benefit is avoiding penalties and tax withholding. But before making their final decision it is advisable to discuss it with their financial advisor first.
Can I roll over my SIMPLE IRA to an IRA custodial account?
Like other tax-deferred retirement accounts, SIMPLE IRAs allow employees to save a percentage of their pre-tax income and employers contribute matching funds on an equal basis. Employees may invest their savings in mutual funds or other types of investments as part of the SIMPLE IRA account.
However, if you switch out of a SIMPLE IRA into another qualified account within two years of rolling it over to another qualified account, taxes and penalties will apply. Your 401(k) custodian will withhold taxes from any money you roll over, which will need to be deposited within 60 days into your new account.
After your two-year period has lapsed, you are eligible to make tax-free rollovers from your SIMPLE IRA into any non-Roth individual retirement account or employer-sponsored plan – including self-directed SIMPLE IRA LLCs which provide access to a wider selection of investments than traditional IRAs and similar accounts do.
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