Simple IRA plans play by rules that are a little bit different from other IRAs. One of the most obvious differences is that you cannot rollover money from a Simple IRA to any other IRA or qualified retirement savings plan (except another Simple IRA) until you’ve been a participant in the Simple IRA for a period of at least two years. Other IRAs and qualified retirement savings plans, for example, do not have this two year waiting period. Another important difference is that you cannot rollover money into a new Simple IRA unless the money is coming from another Simple IRA.
But what does this all mean for you? If you’re looking to create a new Simple IRA rollover account, then you’re likely looking to create an account that isn’t a Simple IRA or to begin participating in an account that isn’t a Simple IRA. Many people participate in IRAs or other retirement savings plans through their employers, but you can also establish an IRA as an individual.
If you’re establishing a new account into which you want to rollover your Simple IRA funds, you need to make sure you have been participating in the new account long enough that it’s ready to receive funds. Rather than a two year waiting period, you may be looking at a much smaller period of time before your new account is eligible to receive funds, usually until you receive your first paycheck. Privately held IRA accounts, on the other hand, may have no waiting periods at all. A simple call to the plan’s trustee will let you know when your account can receive Simple IRA rollover funds.
The other thing you should be aware of is that most IRAs, including Simple IRAs, are funded with pretax dollars. This is not true for Roth IRAs, which are funded with post-tax dollars. If you’re planning to rollover money from your Simple IRA to a Roth IRA, you will need to pay taxes on those dollars. Is this to your advantage? It depends on whether paying those taxes, which nullifies the tax deferred status you enjoyed on that money when it was deposited into the Simple IRA, is worth the advantages you will receive from having the Roth IRA. That is a question you’ll have to answer based on your own financial needs and goals.
The most important thing when establishing a new Simple IRA rollover account is to make sure that the new account is a qualified plan that’s ready to receive your rollover. We have talked about what constitutes a qualified plan and how you can check with your new account to make sure it’s ready to receive funds. However, there is one additional consideration you should make – do you want to perform an indirect rollover or a direct trustee to trustee transfer?
In an indirect rollover, you will receive the money from the Simple IRA as a check and be responsible for depositing it into the new IRA within 60 days. Fail to manage this transaction properly and you could be faced with penalties, withholding and taxes. On the other hand, a trustee to trustee transfer – also known as a direct Simple IRA rollover – will move the money between accounts without exposing you to any of these charges. In light of this, it makes sense to establish a new Simple IRA rollover account that can and will accept a direct trustee to trustee transfer.