Rollovers - Simple IRA's

A rollover from a Simple IRA is a lump-sum distribution from an existing Simple IRA into a Traditional IRA or another eligible employer retirement plan.  The term “rollover” is generally considered a generic term used to describe this process.

However, there are essentially two ways of moving Simple IRA retirement account assets from your former employer.  The first is a transfer, the second is a rollover.  Often, it is advised to perform a transfer rather than a rollover.  Here’s the difference:

• Transfer – The account holder initiates a request with another financial institution to receive funds from your current organization’s retirement account.  The payer institution (your former employer) then sends funds to the payee institution (either your new employer or an IRA) for the amount of your Simple IRA account balance.  This type of transaction does not have to be reported to the IRS (since you never receive the funds), and requires very little effort on behalf of the account owner.  This method generally does not create a taxable event (see 2-year rule exception below).

• Rollover – Unlike a transfer, a rollover is reported to the IRS.  A rollover occurs when the account-owner receives the funds before depositing the funds into an IRA or other qualified account.  In general, the account owner has 60 days to deposit the funds he or she has received into the next plan or IRA after receiving the distribution from the employer.  If done within the 60-day window, a rollover is not a taxable event (see 2-year rule exception below).  However, if the received funds are not deposited into your IRA or new eligible plan account, the IRS may deem the rollover as a distribution.  If so, penalties and taxes generally apply.

Simple IRA 2-Year Rule

As stated above, rollovers (if the funds are deposited back into a qualifying retirement account within 60 days) and trustee-to-trustee transfers are not generally taxable events.  However, these rollovers must abide by a unique “two-year rule”.   This rule essentially states that for the event to qualify as a tax-free rollover, or transfer, the distribution made from the SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be rolled over or transferred into another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA.

After the 2-year period, funds in a SIMPLE IRA can be transferred or rolled over into an IRA other than a SIMPLE IRA.  They may also be rolled over or transferred into a 401k, 403b, or 457 plans, if the specific plan permits.

If the rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed.

General Simple IRA Advice

Occasionally Simple IRA participants find themselves interested in moving funds from a simple IRA to an IRA or another retirement account after ending their employment with their former employer.  My general advice for this situation is to recommend that the funds remain with the employer until the above 2-year rule has been satisfied.

After the 2-year rule has been satisfied, request a direct trustee-to-trustee transfer of the assets into a newly created or existing IRA.  This process should avoid the tax traps so often encountered when employees desire to move retirement funds.

In addition to the avoidance of penalties and tax traps, having funds resting in IRA’s gives the account owner a greater assortment of investment choices and a lower fee structure in general.

 

401kFundAdvice is a small, yet powerful Retirement Plan Investment Advisory Firm.  We offer investment advisory services for Simple IRA account-holders.