Some small employers opt to offer a savings incentive match plan, called a SIMPLE IRA, for employees' individual retirement accounts rather than other types of retirement plans, such as a 401(k) or 403(b). SIMPLE IRAs offer tax-sheltered growth for retirement savings. Before you try to roll over money from a SIMPLE IRA to a traditional IRA, make sure you know the rules.
You cannot roll over money from a SIMPLE IRA to a traditional IRA within the first two years after you open the SIMPLE IRA. The two-year time frame starts running from the day your employer makes the first deposit into the SIMPLE IRA. The only way to move money from a SIMPLE IRA within the first two years is to roll it into another SIMPLE IRA. A transfer to any other IRA during the first two years is considered a distribution by the IRS and will get hit with a 25 percent tax penalty in addition to regular income tax on the full amount. Once you've satisfied the two-year requirement, you're home free regarding rolling over a SIMPLE into a traditional IRA; it won't be taxed as income and won't be subject to a penalty.
No Other Restrictions
Unlike other employer plans, after the two-year period, you can roll over the money from the SIMPLE IRA to a traditional IRA regardless of whether you're still working for the employer or not, your age or any other factor. For example, if you have a 401(k) plan, you can't roll the money into a traditional IRA or any other plan until you've left your job, turned 59 1/2 years old or become permanently disabled.
Both SIMPLE and traditional IRAs are pretax retirement plans, which means rollovers from one plan to another aren't taxable. However, you still have to report the rollover on your income tax return. You must use either Form 1040 or Form 1040A. On the form, you have to report the total as a nontaxable IRA distribution and then, assuming you completed the full rollover, report "0" as the taxable amount and write "rollover" next to it.
You can only roll over money from your SIMPLE IRA once per 12-month period. If you take a second distribution from the SIMPLE IRA within 12 months, it is ineligible to be rolled over. For example, if you complete a rollover from the SIMPLE IRA in January and then take another distribution in June of the same year, you can't roll the second distribution over at all. To avoid the frequency limits, consider using a transfer rather than a rollover. With a transfer, the money is moved by your financial institution directly to your traditional IRA and you never had to touch the money. Not only do you not have to worry about frequency limits, transfers also don't have to be reported on your taxes.
- Internal Revenue Service: Publication 560 -- Retirement Plans for Small Business
- Internal Revenue Service: Retirement Plans FAQs Regarding SIMPLE IRA Plans
- Internal Revenue Service: General Distribution Rules
- Internal Revenue Service: Form 1040 Instructions
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Comstock/Comstock/Getty Images