The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from California is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA rollovers. The advisor asked:
“Can my client roll over money to her SIMPLE IRA?”
Highlights of the Discussion
As of 2016 (or Dec. 18, 2015, to be more precise), SIMPLE IRAs can receive rollovers from traditional IRAs and simplified employee pension (SEP) IRAs, as well as from eligible employer-sponsored retirement plans, such as 401(k), 403(b), or governmental 457(b) plans as long as it has been two years since the individual first participated in the SIMPLE IRA plan. SIMPLE IRAs still may not accept rollovers from Roth IRAs or designated Roth accounts within 401(k) plans.
Prior to 2016, a SIMPLE IRA plan could only accept rollover contributions from another SIMPLE IRA plan. The Consolidated Appropriations Act, effective Dec. 18, 2015, allowed greater portability between SIMPLE IRAs and other plan types by broadening the retirement plans that are eligible for rollover to a SIMPLE IRA.
The restrictions on rollovers from a SIMPLE IRA during the first two years of participation have remained constant. Under both prior and current law, during the initial two-year period, a SIMPLE IRA owner may only move assets between SIMPLE IRAs via a trustee-to-trustee transfer. If during the initial two-year period, a SIMPLE IRA owner transfers or rolls over assets to an IRA or plan that is not a SIMPLE IRA, then the IRS treats the payment as a distribution from the SIMPLE IRA. The SIMPLE IRA owner must include the amount in his or her taxable income. On top of that, a 25% additional early distribution penalty tax applies to the amount, unless the taxpayer qualifies for an exception under IRC 72(t).
SIMPLE IRA assets may never be rolled over to a designated Roth account in a 401(k) plan and vice versa.
For a handy reminder of what retirement assets can roll where and when, please see the IRS’s Rollover Chart.
The rules regarding rollovers to SIMPLE IRAs changed after Dec. 18, 2015, allowing more freedom to move eligible retirement assets into a SIMPLE IRA. The restrictions on rollovers from a SIMPLE IRA during the first two-years of participation have remained constant.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2018, Retirement Learning Center, LLC. Used with permission.