Don’t choose just any old rollover – choose a Simple IRA direct rollover. A direct rollover is defined as the transfer of money from one account directly to another without the money going through the hands of the account holder. You have to initiate this rollover procedure with the manager of the target account, and you have to conform to all rollover rules of the Simple IRA account, as well as pertinent state and federal regulations.
Usually the manager of your Simple IRA plan will have forms for you to complete. These will vary between different institutions, but as with all financial matters, it’s a good idea to keep a copy for your personal records. While this is a reportable event, the IRS doesn’t consider a Simple IRA direct rollover to be a taxable event, so you’ll be able to transfer all of your funds without penalties or taxes diminishing the value of your retirement savings.
Simple IRA rollovers and distributions are defined differently by the IRS and have different tax consequences. You, as the account holder, have to decide which is best for both your long term retirement strategy and your short term needs. If, for example, you have a one-time expense that can be satisfied using part of the money from your Simple IRA while maintaining the remainder in its tax deferred status, then a distribution may be an appropriate choice for you. If, on the other hand, you want to maximize your investment potential and minimize your tax burden, a Simple IRA rollover is likely to be the more appropriate choice.
A distribution is defined by the IRS as an event wherein the value of your account – in part or in whole – comes into your hands. The intentions of the account holder don’t really matter – with a distribution, there will be a withholding portion taken off the top of your balance. In the case of a Simple IRA, if this distribution is made within two years of your first participation, the amount of withholding and taxes may be increased unless you meet certain conditions. In addition, the remaining money carries a taxable burden for that fiscal period.
Think of it this way – are the taxes and withholding you are going to pay on a Simple IRA distribution worth what you’re going to use the money for? Or does it make sense to get the money some other way, such as through a loan from a bank or personal contact? If a Simple IRA plan distribution does make sense, you need to consider which fiscal period in which you should receive the distribution. Does it make sense to take the distribution now or would it be more advantageous to wait a few months? This is a situation where the help of account managers and your personal financial adviser can be invaluable.
If, however, you have recently begun a new job or have enrolled in a private retirement account that offers a higher yield than your former account or is better managed than your former account, you may want to consider a Simple IRA rollover into a traditional IRA. Privately held traditional IRA accounts often offer greater access to your money and a wider range of investment options, making them a good choice for funds in past employer-sponsored Simple IRAs.