How to Do a SIMPLE IRA Rollover Without Paying Taxes
The Two-Year Rule That Makes SIMPLE IRA Rollovers Not So Simple
When you leave an employer with whom you participated in an employer-sponsored retirement plan like a 401(k), you have a few options for what to do with those assets. The option we tend to recommend most often is rolling those assets into a rollover IRA. When you decide to roll over your 401(k) into a regular IRA, there are a few simple steps required to complete the rollover process. 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 IRA, or Savings Incentive Match Plan for Employees, the process can be equally straightforward. But, as part of the rollover process, you'll be asked one additional question you wouldn't be asked if you were rolling over 401(k) assets: How long have you participated in the SIMPLE IRA?
How to rollover SIMPLE IRA assets
Like a 401(k) plan, 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, an IRA, or another qualified employer-sponsored plan like a 401(k). But like a 401(k), you have to ensure that you follow the prescribed rollover process for the rollover in order to avoid taxes or penalties on the asset transfer.
The most important part of the process is ensuring that a check for the total or any portion of those retirement plan assets is not written out to you, which at best will trigger a 20% tax withholding and at worst will result in income taxes due and an early distribution penalty.
Instead, you will want to 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 wire transfer for the benefit of your rollover IRA (which will be denoted with the acronym FBO) and can then be deposited in your rollover IRA.
But while the SIMPLE IRA rollover process is very similar to that of a 401(k), that answer to that one additional question makes all the difference.
The SIMPLE IRA 2-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 either take a distribution from the account or transfer it to another type of IRA during that 2-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 traditional IRA, which will result in steep taxes on the distribution and may even trigger issues with any amount over the annual IRS 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 2-year rule. To keep things simple, you may just want to keep the funds where they are until the two years are up.
Once it has been two years since your first SIMPLE IRA contribution, you should confirm in the plan's custodian that you have, in fact, satisfied the rule (some custodians calculate that period with different "start" dates) before beginning the transfer paperwork.