The poor ole neglected SIMPLE IRA. Many haven’t heard of it, fewer probably have one. The SIMPLE IRA (Savings Incentive Match Plan for Employees) is associated with an employer plan, an alternative option to a company-sponsored 401(k) plan. This post is not to promote the use of a SIMPLE IRA, as most SIMPLE’s would not be self-directed (but, they can be). Quite honestly, it would be rare that I would recommend a SIMPLE IRA plan over a 401(k), regardless of whether the plan is established for an individual or a company with employees.
RATHER, you have a SIMPLE IRA and want to self-direct these funds…what can you do with your SIMPLE IRA? If you have a SIMPLE IRA and wish to self-direct the funds within the plan, you may actually have an advantage over having your funds in a SIMPLE IRA vs. a company-sponsored 401(k) plan. Why? Because, generally speaking, when you are an active employee (W-2) participating in a company-sponsored 401(k) plan, you will not have the option of rolling over your funds to another plan until you terminate employment…thus, no option to self-direct. This is not necessarily the case with your SIMPLE IRA funds you have with your current employer’s SIMPLE IRA plan.
Why, and are there rules? Yes, but let’s explain.
Okay, before you get tooooooo excited about moving your SIMPLE IRA funds out of your current (or old) employer’s SIMPLE IRA plan, there are rules that may limit your ability to rollover funds out of the plan. But, there are also rules that do allow you to rollover SIMPLE IRA funds out of the plan to another plan where you can possibly self-direct these funds.
The general rules related to the SIMPLE IRA (like most retirement plans) is that if you are over 59 1/2, you may take distributions from your SIMPLE IRA without penalty (but still pay taxes, of course). However, short of that, you could face the following additional penalties for a distribution that occurs prior to 59 1/2:
10% Penalty — Generally speaking, if you are under the age of 59 1/2, you will have to pay an additional 10% tax (over and above the regular tax) on the amount you withdraw from your SIMPLE IRA. There are some noted hardship exceptions.
25% Penalty — The funds in a SIMPLE IRA must be in the plan for a minimum of two (2) years from when you first participated in your employer’s SIMPLE IRA plan. IF you take a distribution within the first two (2) years, your penalty will be a 25% penalty (one exception: if you transferred your SIMPLE IRA to another SIMPLE IRA…which does not happen often).
Potential good news IF you have a SIMPLE IRA and want to self-direct the plan….provided you have met the 2 year “seasoning” of the plan funds (e.g., having participated in the SIMPLE IRA for at least two years). Once you have met this two year provision, you can execute a tax-free rollover to almost any plan. Rollover to a 401(k) or other qualified plan (e.g., 403(b)). Yes. A Traditional IRA. Yep. Remember, it is vital you keep in mind the 2 year provision. During the first two years you can only transfer your SIMPLE IRA to another SIMPLE IRA. After the 2 years, you can rollover the funds in a tax-free manner as noted.
Once you have met the 2-year provision, you are free to execute a tax-free rollover provided you correctly execute the rollover in compliance with IRS rollover rules. You will be able to rollover these funds to any of those plans mentioned. Of course, if you rollover funds into a Roth IRA, it is not a tax-free rollover as you will pay taxes on the conversion to Roth. So, o you want to rollover the funds to your self-directed IRA or 401(k)….you can!
The information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.