If you leave your job and leave behind a SIMPLE (Savings Incentive Match Plan for Employees) IRA, you have the option to roll over the SIMPLE IRA balance to a Traditional IRA, another SIMPLE IRA plan or, depending on your new employer's plan, you may be eligible to roll the funds into the 401(k) plan with your new employer. If, however, your goal is to ultimately roll over your SIMPLE IRA to a Roth IRA, you need to process a Roth IRA conversion. Follow these steps to complete the transaction.
First, decide whether the custodian holding your SIMPLE IRA is the one you would like to use for your Roth IRA. If not, you need to determine if you can have a conversion through the transfer process or if you need to transfer the account in-kind and then convert to a Roth IRA. Your chosen custodian is able to help you make a determination. If you need to first transfer the SIMPLE IRA in-kind, you must open an account to accept that transfer in addition to your Roth IRA.
Next, ensure you are eligible to convert the balance. Generally, you must have participated in the SIMPLE IRA for at least two years before a distribution can be made without incurring a penalty of 25%. The starting point for the two-year period is the date of your employer's first contribution to the plan for you. As long as you meet the two-year period requirement, you only owe taxes on the converted balance and do not owe any penalties.
Scott Bishop, CPA, PFS, CFP®
STA Wealth Management, LLC, Houston, TX
The rollover would be considered a Roth conversion, which is permissible after the two-year SIMPLE IRA waiting period for distributions, measured from the date of the first SIMPLE contribution to the plan. Then, if you violate the two-year rule, taxes and a 25% penalty will be triggered. The conversion can be made by transferring the assets from the SIMPLE IRA to a Roth IRA (either at the same custodian or by transferring directly to a new custodian).
As with all Roth conversions, you will owe income tax on the amount converted, and you should plan to pay the tax with money that isn't in the IRA. Also, now that you can no longer re-characterize (undo) a Roth Conversion, you should understand the tax impact before converting any pre-tax retirement account to a Roth (IRA or 401k).