When you leave an employer where you participated in an employer-sponsored retirement plan like a 401(k), in most cases, the process of rolling over your assets to another plan or an Individual Retirement Account (IRA) is very straightforward. If done correctly, there will be no tax due. You won’t even need to write a check.
What Are Your Options?
When you leave an employer where you had a SIMPLE IRA, you have several options for those assets. Funds can be rolled over from a SIMPLE IRA to another SIMPLE IRA, a traditional IRA, or another qualified plan like a 401(k). But just like with a 401(k), you need to make sure you follow the correct process. This can help you avoid taxes or penalties on the rollover of assets.
Choose a Direct Rollover
Opt for a direct rollover, which will withdraw your assets from the former employer’s SIMPLE IRA plan. Then, either cut a check or wire the funds to your SIMPLE IRA. This way, the money can be deposited into your new rollover account.
What Is the Two-Year Rule?
During the first two years after your initial contribution to your SIMPLE IRA, you can roll over any amount from that account to another SIMPLE IRA. It’s a tax-free, direct-to-direct transfer.
However, if you attempt to roll over the funds to a traditional IRA or a 401(k) during that initial two-year period, the funds won’t be treated as a tax-free rollover. Instead, it will be considered a distribution from the SIMPLE IRA and a contribution to the new account. This will result in higher taxes. It may even cause issues with the annual contribution limit for IRAs set by the IRS.
Take Steps to Ensure a Tax-Free Rollover
Confirm the date. Once you believe it has been two years since your first contribution to the SIMPLE IRA, confirm with the plan institution. Make sure you have met the two-year rule before initiating any rollover paperwork. Remember that some institutions calculate that period using different start dates.
Remember the one-rollover-per-year rule for IRAs. According to IRS rules, you are limited to one tax-free rollover in an IRA within a 12-month period. If you do more than one in a year, the distribution will be treated as income. It may be subject to an early withdrawal penalty of 10%.
Consider waiting until the two years are over. Are you concerned about the timing of your IRA rollover? To simplify things, you might want to keep the funds where they are until the two years are up. Again, make sure to confirm with your plan institution that you have satisfied the two-year rule before starting the rollover process.
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Sources:
Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”
Internal Revenue Service. “Rollover Chart.”
Internal Revenue Service. “SIMPLE IRA Plan FAQs—Distributions.”
Internal Revenue Service. “IRA One-Rollover-Per-Year Rule.”
Source: https://www.thebalancemoney.com/how-to-do-a-simple-ira-rollover-without-paying-taxes-2894476
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