Simple IRA Rollover

17 Nov

Simple IRA Rollovers are treated the same as any rollover (explained in our blog rollover-401k-ira) with two exceptions:

Are there any special rollover rules that apply to a distribution from a SIMPLE IRA?

Generally, the same tax results apply to distributions from a SIMPLE IRA plan as to distributions from a regular IRA. However, a special rule applies to a payment or distribution received from a SIMPLE IRA during the 2-year period beginning on the date on which the individual first participated in any SIMPLE IRA plan maintained by the individual’s employer (the “2-year period”).

Under this special rule, if the additional income tax on early distributions (generally, an early distribution is when the employee is under age 59 1/2) under section 72(t) applies to a distribution within this 2-year period, section 72(t)(6) provides that the rate of additional tax (i.e. the early distribution penalty for being under age 59 1/2) under this special rule is increased from 10 percent to 25 percent. If one of the exceptions to application of the tax under section 72(t) applies (e.g., for amounts paid after age 59 1/2, after death, or as part of a series of substantially equal payments), the exception also applies to distributions within the 2-year period and the 25-percent additional tax does not apply.

Additionally, employees only do a tax free rollover from a Simple IRA to another type of retirement plan within the 2-year period mentioned above if the distribution is paid into another SIMPLE IRA. Thus, a distribution from a SIMPLE IRA during that 2-year period qualifies as a rollover contribution (and thus is not includible in gross income) only if the distribution is paid into another SIMPLE IRA and satisfies the other requirements for treatment as a rollover contribution.  So unlike a traditional IRA, you can’t simply roll over to a 401k, 403b or any type of retirement plan until the 2 year rule is satisfied.

Can an amount be transferred from a SIMPLE IRA to another IRA in a tax-free trustee-to-trustee transfer?

During the 2-year period an amount in a SIMPLE IRA may be transferred to another SIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this 2-year period, an amount is paid from a SIMPLE IRA directly to the trustee of an IRA that is not a SIMPLE IRA, the payment is neither a tax-free trustee-to-trustee transfer nor a rollover contribution; the payment is a distribution from the SIMPLE IRA and a contribution to the other IRA that does not qualify as a rollover contribution. After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).

There is yet one additional difference under SEP IRA Rollovers.  Roll over contributions TO a Simple IRA can only come form another Simple IRA and not from any other type of retirement account.

One thought on “Simple IRA Rollover

Leave a Reply

Your email address will not be published. Required fields are marked *