Simple IRA Distribution
Client recently enrolled in company sponsored SIMPLE IRA plan. Subsequently Rollover over 401k at previous employer. Client is purchasing first home and would like to use distribution. It is my understanding that if the client qualifies for the first time home purchase exception a 10% penalty is not incurred for early distribution. Also, although the client has not participated in the Simple Plan for 2yrs, this exception is still avaialble to her so that she does not get hit with the even heavier penalty of 25%. Am I correct on this
Permalink Submitted by Marvin Rotenberg on Wed, 2010-01-27 20:20
I’m a little confused by the question. Money from a 401(k) plan cannot be rolloved into a SIMPLE IRA. Only a SIMPLE or a traditional IRA can go back into a SIMPLE. If the individual qualifies for the exception, higher ed. or 1st time home buyer, there is no 10% penalty or 25% penalty.
Marvin
Permalink Submitted by Alan Spross on Wed, 2010-01-27 20:58
Marvin is correct that a qualified retirement plan cannot be rolled into a SIMPLE IRA, so if this is what happened, there is a big problem. The only rollover allowed into a SIMPLE IRA is a distribution from another SIMPLE IRA.
Assuming for a moment that the 401k went into a TIRA rather than a SIMPLE IRA, there is another problem here with using the SIMPLE IRA for a first home distribution within the two year period. If the first home purchase falls through, the funds cannot go back to the same SIMPLE IRA and are only allowed to be rolled into another SIMPLE IRA. They cannot be rolled into a traditional or Roth IRA and therefore the 25% early withdrawal penalty would be levied and the distribution would be taxable in addition.
If there is another IRA available, the distribution should be taken from the other account. There is also a 120 day rollover period in the event the purchase falls through which allows the funds to be rolled back into a traditional IRA or even a Roth IRA, but not into a SIMPLE IRA.