How to Do a SIMPLE IRA Rollover Without Paying Taxes
Keep the two-year rule in mind
When you leave an employer with whom you participated in an employer-sponsored retirement plan like a 401(k), the process for rolling over your assets into another plan or an individual retirement account is pretty straightforward. If done properly, no tax will be due and you won't even need to write a check.
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 equally straightforward. But as part of the rollover process, you will need to consider an additional question that wouldn't come up if you were rolling over 401(k) assets: How long have you participated in the SIMPLE IRA?
Review Rollover Options
When you leave an employer with whom you participated in 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 straightforward IRA, or another qualified employer-sponsored plan like a 401(k). But as with a 401(k), you have to ensure that you follow the prescribed process for the rollover in order to 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, and either cut a check or initiate a wire transfer for the benefit of your rollover IRA or 401(k) (which will be denoted with the acronym FBO) so the funds can then be deposited in your new, rollover account. And while the SIMPLE IRA rollover process is very similar to that of a 401(k), the answer to the one extra question—about the number of years you've participated in the plan—makes all the difference.
Abide by 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 in a tax-free trustee-to-trustee transfer.
If, however, you attempt to transfer the money to a traditional IRA or a 401(k) plan during that initial two-year period, the money will not be considered a tax-free rollover contribution. Instead, it is considered a distribution from the SIMPLE IRA and a contribution to the new account, which will result in steep taxes on the distribution and may even trigger issues with the IRS's annual IRA contribution limit.
In order 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. To keep things simple, you may just want to keep the funds where they are until the two years are up.
Confirm the Date
Once you believe it has been two years since your first SIMPLE IRA contribution, confirm with the plan's custodian that you have, in fact, satisfied the two-year rule (some custodians calculate that period with different start dates) before beginning any transfer paperwork.
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