What are the Benefits of Performing a Simple IRA Rollover?

31 Mar

The benefits of performing a Simple IRA rollover are, in essence, generally the same as performing any IRA rollover – you get to maintain your money in a tax deferred state, while moving it to a more advantageous investment vehicle.

A Simple IRA allows you to build retirement savings using tax deferred money; this is true for all qualified retirement plans and IRAs, except Roth IRAs. A rollover from a Simple IRA to another qualified IRA maintains the tax deferred status of your money, which is generally considered to be desirable by IRA participants. Of course, if you rollover money from your Simple IRA into a Roth IRA, you will be required to pay taxes on that money, because Roth IRAs – unlike Simple IRAs – are funded with post-tax dollars. Whether or not the benefits of rolling your money into a Roth IRA are worth those taxes is a question that must be carefully considered on a case by case basis.

In addition to maintaining the tax deferred status of your money, the best benefit of, and reason for, performing a Simple IRA rollover is to improve your investment potential.  Different IRAs use different investment strategies – for example, employer-sponsored plans typically offer limited investment options, while privately held IRAs provide many more investment choices.  However, unless you have access to a new IRA that improves your investment potential, there’s little reason to move your money just for the sake of moving it.

Before you perform a Simple IRA rollover, or make any large or long term financial decision, you should evaluate how that decision impacts your long term financial goals and plans.  If you don’t have long term financial goals and plans, it might be a good idea to meet with a financial planner or adviser to develop a solid investment strategy before you make other decisions.

One reason to perform a Simple IRA rollover rather than a distribution is that a distribution will expose you to taxes (as much as 25 percent of the amount you receive) and penalties (as much as 10 percent), especially if the two year rule has not yet been satisfied and you are not yet 59 ½ years old or older.  Receiving a distribution such as this nullifies the tax deferred status of the money from the Simple IRA, which is what a rollover will allow you to avoid.

For this reason, if you choose to perform a Simple IRA rollover, the best case scenario would involve a direct rollover (also known as a trustee to trustee transfer) which ensures that the money moves directly from your Simple IRA into a new qualified account.  If, however, you are 59 ½ years old or older, you can begin to take distributions from your Simple IRA without these penalties, although you may still be responsible for taxes.

If you perform a Simple IRA rollover, expect to receive a Form 1099-R which will need to be included when you file your taxes.  Simple IRA rollovers are classified as reportable events by the IRS, even if they aren’t classified as taxable events and carry with them no specific tax burden.

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