If you want to roll over your assets from a former employer’s SIMPLE (Savings Incentive Match Plan for Employees) IRA, the process can be easy as well. But as part of the process, you will need to think about an extra question that wouldn’t come up if you were rolling over 401(k) assets: How long have you participated in the SIMPLE IRA?
What Are Your Options?
When you leave an employer with whom you had a SIMPLE IRA, you have a few options for those assets. Funds from a SIMPLE IRA can be rolled over into another SIMPLE IRA, a traditional IRA, or another qualified plan, such as a 401(k). But just like with a 401(k), you have to ensure that you follow the proper process. This can help you avoid taxes or penalties on the asset transfer. Opt for a trustee-to-trustee transfer, which will cash out your assets in your former employer’s SIMPLE IRA plan. Then, either cut a check or do a wire transfer for the benefit of your rollover SIMPLE IRA. That way, the funds can be deposited in your new rollover account. The SIMPLE IRA rollover process is very similar to that of a 401(k). But the answer to that one extra question—about the number of years you’ve been in the plan—makes all the difference.
What Is the Two-Year Rule?
During the first two years after your first contribution to the SIMPLE IRA, you are able to transfer any amount from that SIMPLE IRA to another SIMPLE IRA. It’s a tax-free, trustee-to-trustee transfer. But, suppose you attempt to transfer the money to a traditional IRA or a 401(k) plan during that initial two-year period. In that case, the money will not be considered a tax-free rollover contribution. Instead, it is counted as a distribution from the SIMPLE IRA and a contribution to the new account. This will result in steep taxes. It may even trigger issues with the IRS’s annual IRA contribution limit. Here’s the best way to avoid these penalties: Be sure that you don’t roll over your SIMPLE IRA assets into anything but another SIMPLE IRA before you have satisfied the two-year rule.
Take Steps to Ensure a Tax-Free Rollover
Confirm the date. Once you think it has been two years since your first SIMPLE IRA contribution, confirm with the plan’s custodian. Be sure that you have met the two-year rule before beginning any transfer paperwork. Keep in mind that some custodians calculate that period with different start dates. Remember the IRA One-Rollover-per-Year Rule. Per IRS rules, you are limited to one non-taxable IRA rollover per 12-month period. If you make more than one per year, the distribution will count as income. It may be subject to the 10% early withdrawal tax. Consider waiting until the two years are up. Are you concerned about the timing of your IRA rollover? To keep things simple, you may want to keep the funds where they are until the two years are up. Again, be sure to confirm with your plan’s custodians that you have met the two-year rule before starting the rollover.
