SIMPLE IRA 2 year rule
I have a client who started contributing to a SIMPLE IRA in 2002. The company they worked for was purchased in May of 2009. This new company also had a SIMPLE IRA and this client started with that new company’s SIMPLE IRA in May of 2009. The client also transferred their current SIMPLE IRA balance into the new SIMPLE IRA plan. Then, in October of 2010, this client, who is under 59.5 years old, cashed out the SIMPLE IRA. They received a 1099 from the new SIMPLE IRA with box S checked for an under 2 year SIMPLE IRA 25% penalty. Is this whole account subject to a 25% penalty or just the amount that was contributed since the the start of the “new” plan in May of 2009? If so, what’s the best way to accomplish this separation since the 1099 with box S was already issued?
Thanks.
Permalink Submitted by Alan Spross on Tue, 2011-03-01 20:57
There MIGHT be relief under Sec 414 per link below. Simple IRAs are subject to this section, which basically confers some benefits to employees of acquired companies. If they will credit the service and SIMPLE participation period for the acquired company, they might be convinced to amend the 1099R to Code 1 from Code S. Penalty will be 10% on the entire distribution if they will do this.
http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._414._Defi…
Note: I am not positive that 414 should be applied to this case, but it is worth a try.