How Will My Simple IRA Rollover Be Taxed?

16 Mar

A Simple IRA (short for Savings Incentive Match Plan for Employers) is a retirement savings plan designed to help small business owners and their employees prepare effectively for retirement.  If you’re considering moving to a Simple IRA plan, you’ll want to have a strong understanding of the features of the plan, particularly in relation to taxation issues.  A Simple IRA rollover may just be the best choice for your business; now, and in the future.

What is the Simple IRA Plan?

The Simple IRA is a retirement savings plan that allows contributions to be made before tax is taken.  If a small business owner enrolls in one of these plans, he or she chooses between two different contribution models – either all employees receive a non-elective contribution (regardless of whether or not the employee contributes) or the employer makes matching funds available and only contributing employees receive matched funds.  The Simple IRA contribution limits for 2009 were $11,500 for people under age 50 and $14,000 for older employees.

Let’s look at some of the tax benefits of Simple IRAs:

  • Employer Contributions

A Simple IRA plan ensures that employers who meet the eligibility requirements of this plan are able to save money by reducing taxable income.  In addition, small business owners qualify for a business tax deduction when they make contributions for employees and for themselves.

  • Employee Contributions

Contribution by employees to a Simple IRA plan can help to reduce the employee’s personal income tax.  These contributions are typically made prior to taxation; therefore, employees can save significantly should you elect to open a Simple IRA plan.

  • Tax Deferral

Any interest, profit or earnings on contributions made to a Simple IRA plan are allowed to grow without being taxed.  This is a very important benefit of the Simple IRA that helps individual employees and small business owners to earn the biggest possible benefit for retirement.

Understanding Simple IRA Rollover Rules

Many of the tax benefits described above are similar to those of other IRAs and retirement investing accounts.  So now, let’s look at one area where Simple IRAs are very different from these other options – Simple IRA rollovers.

Unlike most other retirement accounts, funds from other accounts – such as 401k, 403b or traditional IRA accounts – can’t be rolled into a Simple IRA.  Only Simple IRA funds can be rolled into a new Simple IRA.

However, funds invested within a Simple IRA can be rolled into other types of retirement accounts (with the exclusion of a Roth 401k), provided a few requirements are met.  Of greatest importance is the fact that funds must be invested in the Simple IRA account for a minimum of two years from the date of the first contribution before they can be rolled over to another plan without penalty.  Simple IRA rollovers that occur before this time may be subject to a steep 25% penalty.

Setting Up a Simple IRA Plan

In order to establish a Simple IRA plan, you simply need to contact a financial institution and they’ll manage the process from there.  With the institution’s help, you’ll need to set up a plan for each employee and provide employees with detailed information about the terms, conditions and taxation rules associated with the plan.  More information can be found on the IRS website or through your financial advisor.

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