Many employers will opt to offer their employees retirement benefits through a SIMPLE IRA (Savings Incentive Match Plan for Employees) rather than a 401k plan. A SIMPLE IRA is much easier to set up, is less expensive, and requires less maintenance than a 401k.
If you’re an employee who receives a SIMPLE IRA from your employer, and are wondering about transfer rules, here’s everything you need to know about rolling over your assets into another retirement plan.
What is a SIMPLE IRA and how does it work?
A SIMPLE IRA is a pre-tax retirement account without a Roth option. As an employee, you can contribute income that you haven’t paid taxes on yet, receive a tax deduction for the years you contribute, and defer tax payments until you make withdrawals in retirement.
If a SIMPLE IRA is offered at a company, employers must make mandatory contributions each year. Employer contributions are not optional, unlike a SEP IRA where employers can change their contribution amounts and decide not to make contributions during a down year.
Employers can choose between two contribution options:
- Make non-elective contributions equal to 2% of an employee’s compensation based on a maximum salary of $305,000 in 2022 and $330,000 in 2023.
- Make matching contributions up to 3% of an employee’s compensation, not limited by any compensation limits.
Employees can contribute up to the SIMPLE IRA contribution limit, which is $14,000 ($17,000 if age 50+) for 2022 and $15,500 ($19,000 if age 50+) for 2023.
What are the SIMPLE IRA rollover rules?
Before we take a look at the rollover rules, let’s refresh our understanding of the SIMPLE IRA withdrawal rules (when you’re taking money out of your account rather than transferring it to another retirement plan).
SIMPLE IRA withdrawal rules
The eligible age to take withdrawals from your SIMPLE IRA without penalties is 59½. Withdrawals made before the age of 59½ will be subject to a 10% early distribution penalty plus income taxes.
If you’re under the age of 59½ and your SIMPLE IRA is less than 2 years old, an additional 15% penalty will be applied on top.
SIMPLE IRA rollover rules
To rollover a SIMPLE IRA without any penalties, you must wait until your SIMPLE IRA is at least 2 years old. The clock starts when your employer makes their first contribution to your account.
With withdrawals, the additional two year rule penalty of 15% is only applied if you take an early distribution before the age of 59½. With rollovers, your age does not matter. If your SIMPLE IRA is less than 2 years old, there is a 25% penalty whether you’re over the age of 59½ or not.
Also read: Direct vs Indirect Rollovers
Only rollovers to another SIMPLE IRA are exempt
If your SIMPLE IRA is under 2 years old, the only rollovers you can perform without triggering the 25% penalty are rollovers to another SIMPLE IRA. Rollovers to any other retirement account will be penalized if your account is under 2 years old.
What happens to your SIMPLE IRA if you leave your employer?
If you receive a SIMPLE IRA from your employer, but you decide to depart from the company, your SIMPLE IRA must still be over 2 years old in order to rollover to another account.
If your new employer also offers a SIMPLE IRA, you can rollover your old SIMPLE IRA into your new SIMPLE IRA without any penalties or taxes. If your account is over 2 years old, then you can rollover your assets to any other retirement plan.
What retirement accounts can I rollover my SIMPLE IRA into?
As long as your SIMPLE IRA is over 2 years old, you can rollover your assets into another retirement plan without any penalties. You can rollover your SIMPLE IRA into a traditional IRA, Roth IRA, SEP IRA, 457b, 403b, 401k or solo 401k.
Depending on the type of retirement plan you rollover into, you may have to pay taxes.
There are two types of retirement account: pre-tax and Roth. A SIMPLE IRA is a pre-tax retirement account.
Rollovers from a pre-tax retirement account into another pre-tax retirement account will incur no taxes. However, rollovers from a pre-tax retirement account into a Roth retirement account will require you to pay income taxes on the rollover amount.
Pre-tax retirement accounts are funded with pre-tax income. You contribute income that you haven’t paid taxes on yet. Instead, you defer those taxes until retirement. When you make distributions at the eligible age of 59½, you’ll owe regular income taxes.
Roth retirement accounts are funded with post-tax income. You contribute income that you’ve already paid income taxes on. When you take distributions in retirement, you’ll owe zero taxes to the IRS.
Because of the different contribution methods of pre-tax and Roth retirement accounts, if you rollover your SIMPLE IRA into a Roth retirement account, you’ll have to pay income taxes on the rollover amount, since Roth accounts are funded with post-tax income.
How to do a SIMPLE IRA rollover?
- First, make sure that you won’t trigger the 25% penalty. Your SIMPLE IRA must be at least 2 years old before you can rollover your assets to another retirement account. If you’re rolling over to another SIMPLE IRA, you’re exempt from this rule.
- Check with your current plan administrator if your account may be rolled over without incurring penalties.
- Inform your new custodian that you’d like to rollover assets from your existing SIMPLE IRA.
- Your new custodian will work with your old custodian to perform a direct rollover.
- Pay the necessary taxes if you’re rolling over your SIMPLE IRA to a Roth retirement account. If you’re rolling over to a pre-tax retirement account (like a traditional IRA, SEP IRA, or 401k), then you will not trigger any taxable events.