SIMPLE IRA transfer and the 2-yr. rule

Submitted by David Newbill on Wed, 2018-01-31 15:06

Client has a SIMPLE IRA which has been established more than 2 years. This SIMPLE IRA account is a directly held mutual fund, commission account. He transferred this account to me recently. His financial adviser at the other firm told him 1 year ago that he could not continue salary deferrals into this account and had to start a SIMPLE IRA managed account with one of the firms authorized money managers because of the fiduciary rule. He now wants to rollover both SIMPLE IRA accounts and his Traditional IRA account to a Real Estate IRA to purchase a home on a college campus to rent to students.

My question to you is: Can my client transfer the managed SIMPLE IRA (open less than 2 yrs.) to the SIMPLE IRA that has been open more than 2 yrs. then rollover the SIMPLE IRA to the Real Estate IRA. Can my client do this without creating a taxable event?

I just remembered the 1 rollover per year rule. The above scenario would entail one trustee to trustee transfer of a SIMPLE IRA and one rollover of a SIMPLE IRA to a Real Estate IRA. It would also entail two Traditional IRA transfers to the Real Estate IRA.

Thank you for your help!

David Newbill



Submitted by Alan - IRA critic on Thu, 2018-02-01 02:33

  • Yes, the client can do that, and without fee or penalty if the newer SIMPLE is a 5305 SIMPLE (DFI), although this SIMPLE is probably set up to make that difficult or possibly delayed to the next notification period. I don’t understand the rationale of the advisor, who could be just using the fiduciary rule as a convenient excuse for what he wants to do.
  • No reason that direct transfer should not be used to move the funds to a self directed IRA.
  • Of course, a self directed real estate IRA can present exposure to prohibited transactions, so client should select an experienced custodian who can offer guidance on these exposures.

Submitted by William Tuttle on Thu, 2018-02-01 11:02

  • First terminology. What do you mean by “established”? The two year period starts with the date of the first contribution not account opening.
  • This two year period begins with the first contribution to the first SIMPLE IRA.
  • While a new custodian may use information provided by the account owner to reflect this date, they are not required to.
  • If they do not and it has not been two years from the first contribution to any new account and you roll this to an IRA. The new SIMPLE IRA custodian will code the 1099-R to indicate an early withdrawal subject to the 25% penalty. Since the withdrawal was not rollover eligible. Any amount > an eligible contribution will be excess, must be removed and the excess and earnings will be taxable.
  • With such a 1099-R, if the client does not take a proactive step and submit an explanation with the return. They will most certainly receive a CP2000. Even with an explanation they may receive one.
  • If this fact pattern does exist, the client may want to wait until any two year period on any such account has been achieved.

Submitted by Alan - IRA critic on Thu, 2018-02-01 16:36

  • Good point about the new SIMPLE custodian possibly not recognizing any period before acquiring the account for purposes of the 2 year waiting period. Therefore, the client should secure acknowledgement of acceptance of the original account first contribution date before transferring out of the SIMPLE account. 
  • If the transfer out is done without doing so and the S code appears on the 1099R, it is not real clear whether the IRS intends the permitted coding to override the actual waiting period or whether a 5329 can be filed to override the penalty and therefore the taxation of the roll out. The 5329 Inst do not provide a specific code for this but dump code 12 can be used if a distribution is incorrectly coded S. Perhaps the IRS will allow the override if evidence of the first contribution date is submitted given the severe consequences associated with the new custodian reporting overriding the actual waiting period compliance.

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