Firms employing no more than 100 employees are able to sponsor Savings Incentive Match Plan for Employees Individual Retirement Accounts or SIMPLE IRAs. As with other types of retirement accounts, you can roll SIMPLE IRA cash into other investments, including certificates of deposits. However, strict rules apply to SIMPLE IRA withdrawals and rollovers, and you may end up with a hefty tax bill when you move your funds.
A SIMPLE IRA may contain both employer and employee pretax contributions. Funds are immediately vested, which means the cash belongs to the employee from the day of deposit. You can withdraw the money at any time without involving your employer. SIMPLE IRAs grow on a tax-deferred basis, meaning no taxes are due until withdrawals are made and you can defer paying taxes by rolling the cash into another tax qualified retirement account. Your employer chooses the investment options for the account and these may or may not include CDs.
Certificates of Deposit
Certificates of deposit are savings accounts available through banks and credit unions. A CD term may last for days or years and have a fixed or variable interest rate. Ordinarily, CDs are taxable accounts, which means you would have to pay taxes on your SIMPLE IRA funds if you moved the money to a regular CD. You avoid paying these taxes if you roll the money into a CD held within a SIMPLE IRA, traditional IRA or other type of tax-deferred retirement account.
Aside from paying ordinary state and federal income tax, you also have to pay a premature withdrawal penalty if you access SIMPLE IRA funds before reaching the age of 59 1/2. This penalty fee rises to 25 percent if you withdraw SIMPLE IRA funds within two years of first funding the account. Between the penalties and income tax you may lose half of your nest egg if you roll your SIMPLE IRA into a taxable CD. You delay the taxes and avoid the penalties by rolling the money into a tax qualified retirement CD.
If you choose to preserve the tax-deferred status of your SIMPLE IRA funds, you have 60 days from the date of withdrawal to reinvest the money in another retirement account. You must accept the cash as taxable income and pay any applicable penalties if you miss this deadline. You can immediately rollover your SIMPLE IRA funds to a plan offered through your new employer if you switch jobs; however, traditional IRA rollovers are subject to a two-year seasoning period. If you attempt to roll SIMPLE IRA cash into a traditional IRA within this time frame, the Internal Revenue Service re-characterizes the rollover as a taxable withdrawal, which means paying ordinary income tax and a 25 percent penalty.