SIMPLE IRA Rollovers

Since December 18, 2015, SIMPLE IRAs can accept rollovers from traditional and SEP IRAs as well as eligible employer-sponsored plans like 401(k). There are a few considerations when rolling funds over to SIMPLE IRAs; please see below for details.

Financial advisors frequently call us with technical inquiries regarding retirement savings and income issues. Below we have compiled some of the most frequently asked questions from these conversations to assist them with answering these queries.

What is a SIMPLE IRA?

A SIMPLE IRA is a retirement savings plan designed for small businesses that offers an easier alternative to 401k plans. It requires companies with 100 or fewer employees and requires either matching contributions of up to 3% of each elective deferral or paying non-elective contributions of at least 2% of each employee’s salary as required by federal regulations.

SIMPLE IRAs differ from 401ks by not offering loan features and being designed solely to encourage employee retention, though employees still have the opportunity to contribute more each year than they could in a 401k due to higher maximum annual contribution limits.

As an employer, you can establish a SIMPLE IRA by adhering to the rules outlined in IRS Publication 560. All eligible employees should receive details regarding where their contributions will be deposited; once allocated funds may be moved between custodians at any time (but subject to 2-year rule); additionally assets from SIMPLE IRA can be rolled over into an IRA or other employer-sponsored plan.

Can I roll over my SIMPLE IRA to a 401k?

Although 401(k)s remain the go-to employer-sponsored retirement plan for small businesses, SIMPLE IRAs also represent an option. Employees can easily move assets from a SIMPLE IRA into another employer-sponsored plan at their new job, or simply transfer the funds directly into an IRA account. Both plans offer investment options such as stocks, bonds, mutual funds, ETFs and REITs and have flexible vesting schedules and safe harbor matches; however 401(k)s tend to incur higher administrative fees like setup fees per participant as well as third-party administrator costs should they use one.

SIMPLE IRAs may be directly rolled over into a 401k; however, you must wait two years after opening it to take distributions before moving them elsewhere; otherwise you’ll incur income taxes and an early withdrawal penalty of 25%.

Can I roll over my SIMPLE IRA to a Roth IRA?

Withdrawals from a SIMPLE IRA are taxed as ordinary income in retirement, similar to Traditional and Roth IRAs. Early withdrawals may incur an additional 10% penalty tax of at least 10% if taken before age 59 1/2.

Under prior law, an individual was required to wait two years before moving funds out of a SIMPLE IRA into another account. Thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH), however, individuals can now transfer them without incurring penalties or delays.

To complete a rollover, employees must request an eligible rollover distribution from their 401(k) plan administrator and deposit it with an FDIC and IRS approved IRA custodian within 60 days. From there, their new custodian can invest the assets according to their investment strategy or you may opt for more hands-on control with Self-Directed IRA LLCs which give “checkbook control” of retirement assets that can be managed easily with help from an advisor.

Can I roll over my SIMPLE IRA to a SEP IRA?

If you are considering switching from a SIMPLE to SEP IRA, consult with a financial planner or tax specialist about your options. Be mindful that the transition may take more time than direct rollover; additionally, SIMPLE plans must be terminated before year’s end to move funds between accounts.

If you transfer assets from a SIMPLE IRA during its first two-year participation period to another IRA or retirement plan during that same timeframe, an additional 25% penalty applies unless you’re aged over 59 1/2. To avoid this fee, direct rollover or 60-day rollover should be chosen instead; with direct rollover, your current custodian withholds income tax from distributions made and deposits it into the new IRA within 60 days.