If you have other questions or concerns about rollovers, visit one of our other educational rollover sites:

IRA Rollover – General Issues
IRA Rollover 401k to IRA
Rollover 401k to ROTH IRA
401k Rollover Options
Rollover 403b to IRA
SEP IRA Rollovers
IRA Rollover to a Roth IRA
IRA Rollover Tax Issues
IRA Direct Rollover
Required IRA Distributions
IRA Rollover to Annuity

OR, Leave a question below in a comment box and check to receive an answer.

There is one instance, however, in which you actually are able to choose a Simple IRA over an SEP IRA (or visa versa).  If you’re setting up an IRA because you’re either trying to consolidate several retirement accounts or you’re a self-employed business owner (even if you’re a small business owner with a sole proprietorship), then you can consider either a Simple IRA rollover or a SEP IRA rollover.

In general, Simple IRAs live up to their name.  They’re often recognized for requiring little to no cost of administration and utilize a relatively simple structure for making deposits – whether or not they’re matched by the employer.  The time to give serious consideration to a Simple IRA is when you’re a small business owner with fewer than 100 employees.  They’re a good way to get your feet wet in the world of retirement accounts while offering a very desirable benefit for your employees.

Conversely, the SEP IRA is wonderful tool to use when you want to include yourself as the business owner in a retirement account along with your employees.  In general, SEP IRAs offer higher contribution limits than most other types of retirement accounts.  As a participant in one of these plans (whether as the employer or as an employee), you’ll be able to accumulate retirement saving much faster than with other types of retirement accounts.

If your career has had several stops and starts and you find yourself with several different retirement accounts, it’s a good idea to consolidate them under one account.  This is when the choice as to the best type of IRA will come into play for you as an individual.  In order to determine whether a Simple IRA rollover or a SEP IRA transfer is best for you and your long-term retirement plans, consult your financial professional.  He or she will be able to direct you through the maze of regulations, rules, and taxes pertaining to these types of transfers.

Whichever type of account you choose, keep in mind that – in most cases – it’s best to choose a direct rollover to move your funds.  To take advantage of this preferred tool to transfer your money, contact the manager of the retirement account you want the money to end up in and inform him or her that you want to initiate a direct rollover to your new Simple IRA or SEP IRA.  This sets in motion a specific set of events that causes the money to be transferred from one retirement account to another, preventing its tax-deferred status from being jeopardized.

Of course, all of this happens according to the IRS rules and regulations, but the take home message is that you, as the account holder, never receive the funds.  The IRS regards this as a reportable event, but not a taxable one, so you won’t be liable for income taxes or other penalties on your Simple IRA or SEP IRA rollover.  The account managers will take care of most of the paperwork, so that all you have to do is sit back and wait for notification that the transfer has occurred.

Step 1: Contact a retirement plan professional or a simple IRA rollover representative of a financial institution that offers retirement plans. Many financial institutions will probably have a pre-approved Simple IRA Rollover plans form that you can review.

Step 2: Choosing a financial institution to maintain employees’ SIMPLE IRAs is one of the most important decisions you will make, since that entity becomes a trustee to the plan. (Alternatively, you can decide to let employees choose the financial institution that will receive their contributions.)

Regardless of who makes the choice, only the following institutions can be designated as trustees of SIMPLE IRA plans: banks, mutual funds, insurance companies that issue annuity contracts, and certain other financial institutions that have been approved by the IRS. Trustees agree to:

1. Receive and invest contributions, and
2. Provide the employer with a summary description of the plan features each year.

Step 3: Choose a model form or other plan document offered by your financial institution. If your financial institution offers a model SIMPLE IRA plan document, you will have a choice of two forms to use:

1. IRS Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use with a Designated Financial Institution, or
2. IRS Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) for Use with a Designated Financial Institution.

The model form you use will depend on whether you decide to select the financial institution that will receive contributions or to let your employees’ select financial institutions.

1. If employees are allowed to select the financial institutions that will receive their SIMPLE IRA -2-plan contributions, you will fill out Form 5304-SIMPLE.
2. If you require that all contributions under the SIMPLE IRA plan be initially deposited with a designated financial institution, you will fill out Form 5305-SIMPLE.

Your choice of the employees covered will be set out in your selected plan document. You can choose to cover all employees without restriction.

Alternatively, you can limit the employees covered to those who received at least $5,000 in compensation during any 2 years prior to the current calendar year and who are reasonably expected to receive at least $5,000 during the current calendar year.

Step 4: Complete and sign the selected IRS form (or other plan document, if not using a model form). When it is completed and signed, this document becomes the plan’s basic legal document, describing your employees’ rights and benefits. Do not send it to the IRS; instead keep it handy.

The Reputation of Your Account Provider

The first thing you’ll want to consider is the reputation of the institution that will be managing and holding your new Simple IRA.  Unfortunately, the size and the age of the institution no longer offer any guarantees as to the stability of a financial institution.  Both state and federal agencies regulate financial institutions and will be happy to provide information on any current investigations or pending cases about an institution with which you’re considering doing business.

Another way to check the reputation of a Simple IRA plan provider is to inquire as to what professional organizations they have membership in and whether they’re in good standing with these groups.  Any institution that doesn’t want to tell you what professional organizations they hold membership in should be avoided.  Of course, membership in professional organizations isn’t a guarantee of quality, but it will give you access to some of the standards and practices that financial organizations  must adhere to, as well as giving you a place to register a complaint for any situations that don’t rise to the level of illegality.

Evaluating Customer Service Records

The next thing you’ll want to evaluate when it comes to Simple IRA plans is customer service.  What you’re purchasing with your money is, in essence, not only the judgment of the provider, but how well they serve you and your needs.  If you cannot find current customers who can give you a good report on the habits of these institutions, you should view them very, very carefully.  After all, you shouldn’t have a reasonable expectation that you’ll be treated differently than existing customers.

Understanding the Simple IRA Provider’s Investment Strategies

When you go in to speak with an account representative at a potential provider, you’ll want to ask what type of investment strategies the Simple IRA plan provider uses.  You need to make sure that their investment strategies are in line with both your short term and your long term goals.  Don’t rely solely on their promotional materials or sales pitches.  Instead, ask to see a copy of their current financial statements and/or information on a current account with customer names removed.

While knowing past fund performance could be a good indicator, as any competent and ethical manager will tell you, past performance is no guarantee of future returns. It is the other, more reliable indicators outlined here that can give you a feel for the competency and the professionalism of the Simple IRA provider you’re considering doing business with.

In your final analysis, keep in mind that even a relatively secure investment like a Simple IRA has a certain level of risk.  It’s up to you to determine the best location for your investments.

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.

Another difference from traditional IRA plans can be found in the Simple IRA rollover rules.  For starters, you have to wait at least two years from the period of time when you first began contributing to the Simple IRA plan before you’re allowed to do a rollover.  So, if you leave the job that provided your Simple IRA after just a year, you’ll need to wait an additional year before you can rollover your plan into another IRA or face paying a hefty fee to the government.  The rollover rules will also depend on how the Simple retirement plan has been set up, as it can be established in either IRA or 401k form.  Most Simple IRAs aren’t done as 401k plans, but be sure to check before you initiate the rollover.

The good news is that there are no Simple IRA rollover limits on the amount of money that you can transfer to your new account.  Completing a rollover isn’t considered to be a part of your yearly contributions, so it won’t affect the overall amount that you can deposit into the account.  However, the type of target account you choose for your Simple IRA rollover will likely have its own restrictions on the amount that can be contributed in a calendar year.

If you’re looking for a plan that will allow you to contribute the maximum amount of money each year and you’re self-employed or own a small business, then you might want to consider using a SEP (Simplified Employee Pension) IRA.  The SEP IRA and Simple IRA accounts are very similar, although the SEP account would allow you to contribute up to $49,000 a year – a hefty sum compared to the maximum contribution of $5,000 each year to a traditional or Roth IRA.  However, if you do not qualify based on your employment status, you’ll need to consider the options provided for in traditional IRAs and 401k plans.

There are other Simple IRA rollover restrictions that you’ll need to consider, including how the money is distributed and the amount of penalties that you can incur if the money is removed from the account early or improperly.  These are all factors that you’ll need to discuss with your financial institution to make sure that the transfer goes smoothly and that you get the most out of your retirement savings.  If you have any questions about the process beforehand, bring them up and address them before the transfer is initiated so that you aren’t faced with problems later on.

Something else to consider is that if you’re starting a new Simple IRA account with your new employer, the only type of IRA that can be transferred into the account is another Simple IRA.  So, if you’re thinking about moving funds from a Traditional IRA or 401k plan to your new employer’s plan, you won’t be able to transfer the funds if your new employer’s account type is a Simple IRA.  In this case, you’ll need to keep both of these retirement plans open to make sure that you’re getting the most out of your money.

If you’ve recently opened a new Simple IRA and you want to move funds into it from another retirement plan into this account, this is only possible if the funds are coming from another Simple IRA.  On the other hand, if you meet the two year requirement and you’re looking to complete a Simple IRA rollover out of the Simple IRA and into a different type of account, then this is also possible, with a few exceptions.  One thing to remember if you’re performing a Simple IRA rollover is that it’s far easier to do a direct transfer, rather than an indirect one.  This means that the funds that are coming from the Simple IRA rollover will be transferred directly between the banks without any third party interference.

Another thing to consider is that if you’re moving your money from a Simple IRA plan into a Roth IRA plan, you’ll need to pay taxes on the money that’s being taken out of the Simple IRA.  This is because the money that’s deposited into Roth IRAs has already been taxed, while the money in the Simple IRA hasn’t.  However, the upside is that when you withdraw the money later in life, you won’t have to pay taxes on your withdrawals.  Even if taxes go up in the future or you find yourself in a higher tax bracket upon retirement, the money that’s been put into the Roth IRA is protected.

As you can see, when you’re setting up your new Simple IRA rollover account, there’s a lot of information to consider.  The good news is that you should have a lot of options available – just don’t get too overwhelmed by the little details!  A qualified financial planner should be able to help you clarify any points that you find confusing.

After it has been open for a minimum of two years, funds from any Simple IRA plan can be rolled into most other types of IRAs; however, be aware that a Simple IRA can only receive a rollover from another Simple IRA.  If you have questions about the type of IRA you have, take a look at your plan prospectus or talk with the person or organization through which you opened the account – usually, your employer’s human resources or benefits manager, or your own financial manager.

To set up a direct transfer, contact the manager of the new Simple IRA (also called the “target account”) and make sure that the new IRA is active and ready to receive the transfer.  This may seem like a bit of a no-brainier, but it’s actually one of the most common mistakes that occur when initiating a Simple IRA rollover.  The danger is that if the account isn’t ready, the money could be redirected back to you, which drastically changes the tax status of your money.  This specific situation is what you’re trying to avoid when performing an IRA rollover.

Now, once you know that the target account is ready, inform the manager of this Simple IRA that you want to initiate a direct Simple IRA rollover.  Be sure to use those exact words – “direct rollover” – as this begins a very specific financial process.  The new manager will contact his or her counterpart at the old IRA and request that the funds be transferred directly into the new account.  Each institution will have some paperwork that you’ll need to fill out detailing exactly how this transfer will occur, and the account managers will be able to guide you as you fill them out if you have any questions.

Once this paperwork is complete and you’ve requested your Simple IRA rollover, the manager of the Simple IRA will have the funds transferred to the new account by the most convenient means.  This may be by check, wire transfer or whatever other financial tool the managers elect to use.  The key is that you, as the account holder, never take possession of the funds.  The funds, of course, remains your money, but it will only be handled by the IRA account managers.  After a reasonable amount of time, contact the managers of the Simple IRA and your new account to make sure that the rollover is finalized and the new funds are where they’re supposed to be.

As a result of your Simple IRA rollover, there will be some paperwork that must be filed with the IRS, but the account managers will take care of this.  Know that the IRS will consider a direct rollover to be a reportable event, but not as a taxable one.  Taking money from one bucket, if you will, and moving it to another bucket maintains the tax-deferred status of your money, which is – after all – your goal in growing your retirement savings.

For starters, the most common reason to perform a Simple IRA rollover is access to a new Simple IRA account or account provider.  A Simple IRA account is usually offered as part of a benefits package that comes with a new job.  Alternatively, you may be eligible to establish a personal Simple IRA or other IRA account.  Although you aren’t obligated to move funds out of any old Simple IRA plans you still hold, you may find that this financial move makes sense.

For example, look at the performance of your existing Simple IRA plan.  Has the management changed?  Has there been a decline in performance?  Maybe your old Simple IRA account offered limited access to particular investment opportunities that would be well suited to your retirement goals (privately held IRAs typically offer a much greater selection of investment options).  Any one of these reasons – or a combination of them – might signal a need to perform a Simple IRA rollover

You’ll also want to consider any recent changes in your life.  Do you have new needs, such as increased property taxes?  Your age can also be a good reason to perform a Simple IRA rollover.  Investment decisions that made sense for you as a young investor may change as you get closer and closer to retirement and to the goal of cashing out the plan.  As a rule, investment portfolios should bear less risk the closer the account holder is to retirement.  If you’re approaching retirement and your old Simple IRA accounts don’t offer good access to stable investment options, you may want to consider a new provider.

Another consideration to make is the ease of managing your retirement funds across multiple providers.  Retirement accounts – like any other investment accounts – need to be rebalanced over time.  To understand why, consider a portfolio that’s invested in 50% risky tech stocks and 50% stable bond funds.  If the tech stocks go up in value, the balance of the portfolio may be off, causing the account holder to be exposed to more risk than he or she initially intended.  Rebalancing helps to adjust for these disparities, but it can take time to accomplish if you hold multiple accounts.  For this reason, a Simple IRA rollover may make sense.

Finally, when it comes time to move your money, be sure to request a direct rollover from both the old and new account providers.  This type of transaction will maintain the tax deferred status that you want.  If the money does come into your hands via an indirect transfer, there’s a good chance that you’ll be exposed to taxes and penalties that can be avoided by simply requesting a “direct rollover.”  Carrying out the Simple IRA rollover in this way will ensure that your retirement savings remain undisturbed, increasing in value until you need them later in life.

This may seem overly limiting, but the idea is that by making sure that only money that’s been set aside in a Simple IRA can be rolled over, they’re regulating the kind of money that goes into the account to make sure that it follows all of the same rules.  Consequently, if your employer is opening up a Simple IRA for you and you already have an existing IRA account, you’ll need to keep both of them active in order to get the most benefit out of your retirement savings.

However, if you’re someone who has a pre-existing Simple IRA and you’re looking to have a rollover completed that would move your money into a traditional IRA account, then this is possible.  The only requirements that you’d have to meet if you want to do a Simple IRA rollover into another type of account are the time limits and the taxation implications (if you choose to go with an indirect rollover method).  This means that you can complete a Simple IRA rollover into a different type of IRA without any potentially hazardous problems.

The time limit, in this case, means that you can only roll over funds that have been invested in your existing Simple IRA for a minimum of two years.  If you’ve only had your Simple IRA for a year, you’ll want to wait another year before initiating the transfer – otherwise, you could be subject to hefty fines from the government.  In addition, you’ll want to request a direct Simple IRA rollover, as the indirect style of rollover can expose you to unnecessary taxes and penalties, depending on how the rollover is carried out.  If you have any questions about the different types of accounts or rollovers available to you, you’ll want to consult a qualified financial advisor to ensure you make the right choices for your retirement goals.

When you meet with the advisor, you’ll want to take in all of your paperwork so that the advisor will have a complete picture of your finances.  This will be helpful in case there are any accounts that you wish to transfer or consolidate, as your financial advisor will be able to determine if they can receive a Simple IRA rollover without any problems.  The advisor will be able to recommend the rollover strategies that make the most sense for your financial future.