Internal Revenue Service (IRS) rules for SIMPLE individual retirement accounts (IRAs) state that employees who participate in this type of tax-deferred retirement account may not transfer funds to another retirement plan for two years after opening a SIMPLE account. What does this mean, though, if you leave the company within two years, but your new employer does not offer a SIMPLE?
Here's a look at how SIMPLE IRAs work and what you can do if you find yourself in this situation.
Rules Governing SIMPLE IRAs
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA is an appealing tax-deferred retirement plan for businesses that have 100 or fewer employees. An employer sets up the plan with a financial institution, which then administers it. The paperwork is minimal—just an initial plan document and annual disclosures to employees. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make for employees.
To participate in a SIMPLE IRA, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union.
To open an account, the employee must fill out a SIMPLE IRA adoption agreement. Once the plan is established, employers are required to contribute to it each year unless the plan is terminated. However, employers may elect to change their contribution amounts—between the 2% mandatory contribution and the 3% matching contribution—if they follow the IRS's SIMPLE IRA rules.
- Employees must wait two years from the time they open a SIMPLE IRA account before transferring those funds into another retirement plan.
- If you withdraw money from a SIMPLE IRA during the two-year waiting period, you may be subject to a 25% early-distribution penalty.
- However, transfers or rollovers between two SIMPLE IRAs are exempt from the IRS's two-year rule.
- When the two years are up, you can move the assets from your SIMPLE IRA into an eligible retirement account via rollover, transfer, or Roth conversion.
If You Leave During the Two-Year Waiting Period
During the first two years of opening a SIMPLE IRA account, you may not transfer those assets into another retirement plan. This two-year period begins on the first day that your employer deposits a contribution to the SIMPLE account. Any distributions that you do take from a SIMPLE IRA during this two-year period are subject to an early-distribution penalty of 25% if you are less than age 59½ at the time of the withdrawal.
There's one exception. The two-year waiting period does not apply to transfers or rollovers between two SIMPLE IRAs. So if you are no longer with the company that sponsored the SIMPLE IRA, you can either leave the assets where they are until the two-year waiting period is over, or you may roll over the assets to a SIMPLE at another financial institution.
If you have a SIMPLE IRA, your employer must allow you to hold your assets at another financial institution—which you may choose if you wish.
After the Two-Year Period
When two years have elapsed, you may move your SIMPLE IRA to another eligible retirement plan by means of a transfer, rollover (including a direct rollover), or Roth conversion, whether or not you've remained with the company that sponsored the SIMPLE.
To accomplish the transfer, you would need to submit a SIMPLE IRA adoption agreement along with a copy of the Form 5304-SIMPLE (or Form 5305-SIMPLE) that the employer filled out to establish the SIMPLE IRA. The transfer can happen once the new account has been established.