SIMPLE IRA Rollovers

Employers participating in a SIMPLE IRA plan may provide up to 3% matching contributions on elective deferrals made by their employees, and may also make non-elective contributions directly into the plan.

Employer contributions to this retirement savings plan are always fully vested – an attractive feature not available with other plans.

Eligibility

The SIMPLE IRA plan gives employees an easy, tax-deferred way to save for retirement. Employees can contribute through salary reduction contributions automatically deducted from paychecks before federal income taxes are applied, while employers have the option of matching these contributions or providing a 2% non-elective contribution for all eligible employees.

These plans are easy to administer and typically have minimal filing requirements, making them particularly suitable for small businesses without the resources to handle complex administrative processes associated with larger retirement plans.

IRS rules stipulate that employers should allow any employee who earned $5,000 or more over two previous years to participate. Businesses can specify less stringent eligibility requirements on their SIMPLE adoption agreement in order to increase participation rates. Furthermore, in the first two years of participation SIMPLE IRA assets cannot be rolled over into another account or into 401(k) plans; this rule remains in place even if participants receive them via direct trustee-to-trustee transfers.

Contributions

A SIMPLE IRA is an employer-sponsored retirement savings plan that allows employees to make pretax contributions and enjoy tax-deferred growth. Employees contribute a percentage of their salary directly into their SIMPLE IRAs and employers can match those contributions up to 3% of employees’ compensation; typically for eligibility, employees must have earned at least $5,000 over any two previous years and anticipate earning that same amount again this year.

Employers can set up a SIMPLE IRA either with a financial institution to hold each participant’s assets or allow participants to choose their own custodian. Employers must set up the plan by November 2 or risk incurring penalties for terminating it early; otherwise if they choose to do so prior to two years have passed, participants must meet minimum distribution requirements with sufficient funds remaining to meet minimum distribution requirements and the custodian will withhold income tax on withdrawals.

Rollovers

Employees converting from a SIMPLE IRA to a 401k may do so without incurring penalties; however, it’s wise to carefully and thoughtfully plan their transition. When making their choice between these plans, employees should carefully evaluate both plans to determine which best serves their business’s needs.

Rollover rules vary by plan type. For instance, during your first two years participating in a SIMPLE IRA, assets can only be moved directly to another SIMPLE or traditional IRA via trustee-to-trustee transfer. Any attempt at moving money out would be treated by the IRS as withdrawal and taxed accordingly.

Starting in 2024, SIMPLE IRA plans that are converted to replace Safe Harbor 401(k) plans will no longer require compliance with the 2-year rule for conversions to replace Safe Harbor 401(k). However, any tax-deferred growth of your investments will become taxable when they’re taken out later in life.

Taxes

As a rule, rolling over retirement assets to a SIMPLE IRA should be straightforward for employees – they simply follow the IRS rollover chart’s guidelines. But there are a few considerations worth noting.

Employers must either match up to 3% of an employee’s compensation with matching contributions of their own or contribute a set percentage based on total employee pay; both options cannot be offered simultaneously during one plan year.

SIMPLE IRA participants moving between eligible 401(k) plans and other retirement accounts may do so without incurring tax penalties; however, they should make sure they contact their 401(k) custodian to ensure the account has been open for two years or they could face an early distribution penalty of 25%. The same rule applies when moving between SIMPLE IRAs – both must have been open at least two years; many companies use third-party administrators (TPAs) for these transactions to manage them efficiently.