How to Do a SIMPLE IRA Rollover

Keep the Two-Year Rule in Mind

A young man reviews his investments using a laptop.
•••

MoMo Productions / Getty Images

 

What happens when you leave an employer where you participated in an employer-sponsored retirement plan like a 401(k)? In most cases, the process for rolling over your assets into another plan or an individual retirement account (IRA) is pretty easy. If done right, no tax will be due. 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 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?

Key Takeaways

  • Opt for a trustee-to-trustee transfer to roll over a SIMPLE IRA. 
  • During the first two years you contribute to a SIMPLE IRA, you will pay taxes if you roll it over to a traditional IRA or 401(k). 
  • If you haven’t met the two-year rule, transfer your SIMPLE IRA to another SIMPLE IRA to avoid tax issues.
  • You can also wait to roll over funds until two years have passed.

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.

Important

If you receive a check for the purposes of a rollover, you will in most cases have 60 days to deposit it in your IRA.

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 if 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 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.

Warning

Under this rule, the additional tax may be 25% instead of the usual 10% rate for early distributions.

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, in fact, 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. Concerned about the timing of your IRA rollover? To keep things simple, you may just 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.