2 Year Rule for SIMPLE IRAs

Submitted by Jack Thomas on Wed, 2015-10-21 21:29

Does the 2 year additional tax penalty of 25% apply if employee transfers their SIMPLE IRA within 2 to another SIMPLE IRA?

Does it matter if the SIMPLE IRA that the funds are transferred to are at a different employer? Or does it have to be under the umbrella of the same employer, but perhaps a different custodian?

Thanks.

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Permalink Submitted by Alan - IRA critic on Wed, 2015-10-21 22:27

Within 2 years the SIMPLE IRA can be transferred to any other SIMPLE IRA by direct trustee transfer without tax or penalty. Per Notice 98-4.

Permalink Submitted by Jack Thomas on Wed, 2015-10-21 23:05

Thanks! If the account is less than 2 years old and the employee is older than age 59 1/2, would they have to pay the 25% tax then?

Permalink Submitted by Alan - IRA critic on Wed, 2015-10-21 23:28

No, there is no tax or penalty for a direct transfer to another SIMPLE. But if a distribution was taken, then the distribution will be subject to both tax and 25% penalty, and cannot be rolled over.

Permalink Submitted by David Mertz on Thu, 2015-10-22 00:40

If the employee was older than 59½ at the time of the distribution, there is no penalty.
I don’t see anything in § 408 or Notice 98-4 that says that the distribution from a SIMPLE IRA that otherwise would be subject to the 25% penalty cannot be rolled over to another SIMPLE IRA within 60 days. Notice 98-4 Q & A I-3 indicates that if the distribution is paid into another SIMPLE IRA and satisfies the other requirements of § 408(d)(3), it qualifies as a rollover contribution. In this context, the same as in § 408(d)(3)(A)(i), “paid into” seems to mean “deposited into.” It does not preclude constructive receipt by the employee in the interim. However, the receiving custodian might resist such a rollover if they are not confident that the distribution was from a SIMPLE IRA. https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Rollovers does indicate that it qualifies as a rollover only if the distribution is “transferred” into another SIMPLE IRA, but if the money is transferred trustee-to-trustee, it’s neither a distribution nor a rollover, so the meaning of the IRS FAQ is unclear. Obviously the safest thing to do is a trustee-to-trustee transfer, which would also avoid anything to do with the one-per-12-months rollover rule.
Rolling over or transferring a SIMPLE IRA from one employer to a SIMPLE IRA of another employer seems messy. It seems likely that doing so would make the money moved to the new employer’s SIMPLE IRA subject to the 2-year period established by the new employer’s first contribution rather than the period established by the old employer’s first contribution. It’s not clear to me how it would be handled if the money was transferred from one SIMPLE IRA to an earlier established SIMPLE IRA.