SIMPLE IRA Rollovers
As of 2016 (or December 18, 2015, when the law took effect), SIMPLE IRAs can accept rollovers from traditional and SEP IRAs as well as eligible employer-sponsored plans.
However, the additional tax on early distributions increases from 10% to 25% if you take action within two years of enrolling in a SIMPLE IRA plan.
Taxes
A SIMPLE IRA allows employees to save pre-tax money from their paychecks and reduce taxable income, with employers matching workers’ contributions dollar for dollar up to 3 percent of salary. Money deposited in a SIMPLE IRA immediately vests; meaning you own it regardless if you leave the company later on for any reason.
SIMPLE plans do not permit Roth contributions, meaning any withdrawals in retirement will be taxed. Thankfully, once two years have passed after opening your SIMPLE IRA you can roll it over into another type of IRA to avoid early withdrawal penalties and use those funds towards major unreimbursed medical expenses, qualifying higher education costs, or purchasing your first home.
Rollovers
Rollovers from SIMPLE IRAs to 401ks may be possible, though more complicated than regular IRA-to-IRA rollovers due to a two-year rule: during their first two years with their SIMPLE IRA, employees can only transfer their funds tax-free trustee-to-trustee transfers between other SIMPLE or traditional IRAs or SIMPLEs; any transfers to non-SIMPLEs count as both distribution and contribution and may incur steep taxes and penalties.
As soon as two years have passed, employees can move their assets into either a traditional or Roth IRA through either rollover or direct transfer. If they choose to invest, FDIC- and IRS-approved custodians are necessary within 60 days of receiving an eligible rollover distribution; The IRA Financial Group offers assistance for SIMPLE IRA investors seeking the appropriate FDIC- and IRS-approved custodian for their funds transfer correctly; additionally they offer self-directed IRA LLC accounts so clients have greater “checkbook control” over their retirement investments.
Choosing a custodian
If your clients are considering opening a SIMPLE IRA, an investment professional can assist them with understanding all their available options as well as managing any required notices or other paperwork related to it.
Selecting a custodian for your SIMPLE IRA is of vital importance, since its rollover rules differ significantly from conventional IRAs. For instance, there is typically a two-year waiting period before participants can make penalty-free transfers into another SIMPLE IRA; this timeframe may be waived in cases involving assets from qualified retirement plans like 401(k), 403(b), or 457(b).
A good custodian will have specialists available online and by phone to answer questions regarding your investments, transactions and contributions in accordance with IRS requirements. Furthermore, their website should offer comprehensive user-friendly capabilities for tracking investments and making transactions easily. Finally, reports regarding contributions and investment activity should also be readily available to meet IRS guidelines.
Getting started
As a small business owner, you may wish to provide your employees with an employer-sponsored retirement plan in order to help them save for their futures. But finding out how best to go about doing it may prove daunting.
Employers may find SIMPLE IRAs attractive because of its ease of set-up and administration, and its low eligibility requirements – drawing both new talent as well as maintaining current workforce members by offering such plans.
However, it’s essential to understand the rules surrounding rollovers into a SIMPLE IRA. Employees may only move money out after two years have elapsed – this timeframe helps prevent premature distributions that might incur penalties. You must inform your payroll provider of your intentions to terminate and open a new eligible 401(k) replacement plan; their staff should then assist your participants with moving assets over.
Categorised in: Blog