The Step-by-Step Guide to Rolling Over Your Simple IRA

The Step-by-Step Guide to Rolling Over Your Simple IRA

Always keep in mind the Two-Year Rule

What happens to the money in your account when you leave a company where you participated in an employer-sponsored retirement plan such as a 401(k)? The process of rolling over your assets into another plan or an individual retirement account (IRA) is rather straightforward in the vast majority of instances. If everything is done correctly, there will be no tax to pay. You won’t have to do anything, not even write a check.

If you want to roll over your assets from a SIMPLE IRA (Savings Incentive Match Plan for Employees), the process might be simple. “SIMPLE” stands for Savings Incentive Match Plan for Employees. However, as part of the process, you will be required to think about an additional question that would not arise if you were rolling over 401(k) assets, and that question is as follows: How long have you been a member of the Simple Individual Retirement Account?

Key Takeaways

When rolling over a SIMPLE IRA, you should go with a trustee-to-trustee transfer.

In the first two years that you make contributions to a SIMPLE IRA, you will be subject to taxation on those contributions if you decide to roll them over to a standard IRA or 401(k) (k).

If you haven’t had your SIMPLE IRA for two years yet, transferring it to another SIMPLE IRA can help you avoid any tax problems that might come up.

You also have the option of delaying the process of rolling over funds until two years have passed.

What Kinds of Choices Do You Have?

After leaving a company where you held a SIMPLE IRA, you have a few options for what to do with the assets in that account. It is possible to transfer money from one SIMPLE IRA to another SIMPLE IRA, a traditional IRA, or another eligible plan such as a 401(k) (k). On the other hand, in the same way, as with a 401(k), you need to make sure that you follow the correct procedure. This may help you avoid paying taxes or other penalties related to the transfer of the asset.

You may choose to liquidate your assets in the SIMPLE IRA plan offered by your previous employer by opting for a transfer from one trustee to another. After that, you can either send a wire transfer or write a check to the benefit of you rolled over SIMPLE IRA. With this approach, the money will be able to be transferred into your brand-new rollover account.

If you get a check for the purposes of a rollover, you will typically have a period of sixty days in which to deposit the funds into your individual retirement account (IRA).

The rollover process for a SIMPLE IRA is quite similar to the process for a 401(k) (k). What happens next depends on how you answer that last question about how long you’ve been in the plan.

What Does It Mean to Follow the Two-Year Rule?

You are permitted to transfer any money from one SIMPLE IRA to another SIMPLE IRA within the first two years that follow the year in which you made your initial contribution to the SIMPLE IRA. It is a transfer from one trustee to another that is not subject to taxation.

But let’s say you decide to invest the money in a standard IRA or a 401(k) plan during the first two years of the account’s existence. What would happen? If that happens, the money won’t be eligible to be rolled over into a tax-free account and you’ll have to pay taxes on it. Instead, it is recognized as a withdrawal from the SIMPLE IRA and a deposit into the new account that has been opened. Because of this, taxes will be very high. It is also possible that it will cause problems with the annual IRA contribution limit set by the IRS.

This provision allows for an additional tax of up to 25% on early payouts, which is significantly higher than the normal rate of 10%.

The following is the most effective strategy for avoiding these fines: Before you have completed the two-year rule, it is imperative that you do not roll over the assets of your SIMPLE IRA into any other type of account except another SIMPLE IRA.

Take the Necessary Steps to Guarantee a Rollover That Is Tax-Free

Make sure the date is set. Confirm this information with the plan’s custodian once you believe it has been two years since you made your first contribution to your SIMPLE IRA. Before initiating any paperwork for a transfer, you need to be sure that the two-year rule has been satisfied. Think about the fact that different custodians will figure out that time using different starting dates. 

Keep in mind that the IRA only allows one rollover each year

According to the criteria set forth by the IRS, you are only allowed one rollover of a non-taxable IRA into a traditional IRA every 12 months. If you make more than one distribution in a given year, it will be included as income for you. It is possible that the 10% early withdrawal tax will apply to this withdrawal.

Think about putting off the decision till the end of two years

Are you concerned about the timing of the rollover of your individual retirement account (IRA)? If you want to keep things as easy as possible, you should probably just leave the money where it is until the two years are up. Before beginning the rollover process, you must, once more, check with the administrators of your plan to ensure that you have complied with the two-year limit.

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