Simple IRA Rollover
I have a client who had a Simple IRA with a previous employer in which he had been participating for more than two years. He changed employers and had begun a new simple ira with the new employer. He then transferred the old money that had satisfied the two year requirement previously into the new simple ira. He has not been with the current employer for more than two years and has retired. I know the contributions to the new simple would be subject to the two year rule, but what about the old money that had previously satisfied the two years with the previous employer? Is this money subject to a new two year rule or can he roll this into a TIRA.
Permalink Submitted by Alan Spross on Wed, 2012-06-06 18:58
By rolling the other SIMPLE to the current one, he is now subject to a 2 year waiting period measured from the date of the first contribution from the new employer. This is one reason why most SIMPLE IRA owners transfer funds to a TIRA after becoming eligible.
Permalink Submitted by Mark Kirsch on Thu, 2012-06-07 11:07
I know he would be subject to a two year period on the contributions, but I have read nowhere either pro or con about the old simple IRA transfer being subject to a new two year period of time, can you tell me where it is written?
Permalink Submitted by Alan Spross on Thu, 2012-06-07 22:26
Unfortuneately, this situation is not clearly defined in the various IRS publications. Hard to imagine why after this many years. A thorough search on my part has not turned up anything definitive and that is another indication that no one wants to guess what the answer is.
Attached is Notice 98-4 which was the amended IRS guidance on SIMPLE IRAs and the rules remain unchanged since that time. The question boils done to the definition of “the employer”, therefore my conclusion is that the 2 year period applies to contributions for each specific employer separately. Q&A In Sections H and I address the 2 year waiting period, but still do not define what is meant by “the employer”.
http://www.irs.gov/pub/irs-irbs/irb98-02.pdf
You will see that there is mention of providing information between trustees when the “designated financial institution” is changed. Tne trustee issuing the 1099R should make an attempt to determine when the 2 year period began for each employee if they were not the initial SIMPLE IRA trustee. I think therefore that the 2 year period is measured from the first contribution for the current employer regardless of how many different SIMPLE IRA trustees are used for each employee’s accounts.
But your question refers to the SIMPLE IRA of a previous employer, one that I assume is not an affiliated employer. The SIMPLE IRA name and concept are designed to avoid complexity, such rollovers from any plans other than other SIMPLE IRAs, no discrimination testing, no income limits etc. The SIMPLE IRA trustee may include data with respect to the 2 year period for the employer named on the 5304 or 5305 SIMPLE, but is not going to track the first contribution date for a different employer when the SIMPLE IRA is transferred to the current employer’s SIMPLE. The 1099R penalty code (Code S) will be based only on the date contributions were first made for the current employer.
I suppose the client could be aggressive if he wants to transfer funds out to a TIRA and file a Form 5329 penalty exception to the S coding. He could use misc code 12 and state “two year rule has been achieved” to override the S code (using his idea of how the 2 year period is determined). There is no specific code for this override, probably another indication that the current trustee codes will be correct and only reflect the time period of the current employer. Of course, the 25% penalty is only part of the problem if the IRS does not agree. Probably worse, the distribution would not be eligible for rollover. The client may qualify for a different penalty exception that would eliminate the penalty, but still could not roll the amount over to a TIRA unless the IRS concurs or fails to understand the entire transaction.