Ability to Move SIMPLE IRA to Trad IRA

Submitted by Steve Benjamin on Thu, 2016-08-18 15:44

Dad (age 56) first opened and funded a SIMPLE IRA less than 2 years ago with his son as the sole beneficiary. Dad has died.
The son would like to stretch the payments over his own life expectancy. Must the Beneficiary IRA be a SIMPLE Beneficiary IRA or can the funds be transferred out of the SIMPLE IRA directly to a Traditional Beneficiary IRA?

Thank you so much!!



Submitted by William Tuttle on Thu, 2016-08-18 17:55

72(t)(6) 25% penalty does not apply to distributions made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

Submitted by Steve Benjamin on Thu, 2016-08-18 18:14

…what I meant was:   is it permissible to move the SIMPLE IRA funds to a TRADITIONAL (Beneficiary) IRA even if the SIMPLE 2-year requirement has not been met? Thanks!

Submitted by William Tuttle on Thu, 2016-08-18 22:44

72(t)(6) is what defines the 25% penaly for a rollover < 2 years other than to another SIMPLE IRA.72(t)(2)(A)(ii) provides an exception for the death of the account holder.Another reference is in IRS Notice 98-4 in the answer to question I-2:“If one of the exceptions to application of the tax under § 72(t) applies (e.g., for amounts paid after age 59 1/2, after death, or as part of a series of substantially equal payments), the exception also applies to distributions within the 2-year period and the 25-percent additional tax does not apply.”  

Submitted by Alan - IRA critic on Fri, 2016-08-19 02:50

The ability for a beneficiary to do a transfer out of a SIMPLE IRA has been debated for 20 years, because it does not seem logical that they cannot. However, there is no exemption per Notice 98-4 for beneficiaries. Therefore, the account is either stuck where it is or would have to be transferred to another inherited SIMPLE IRA. It is clear however that no penalty will apply to distributions including RMDs which are death benefits coded 4 on the 1099R. The SIMPLE IRA Custodian therefore would probably report any transfer to a non SIMPLE IRA as a distribution until the 2 years was up. REF: Notice 98-4, I, Q 4

  

Submitted by William Tuttle on Fri, 2016-08-19 03:07

Alan, how does the 72(t)(2)(A)(ii) exception not apply. To me it is clearly referenced in my bolded snippet of 98-4 Q&A I-2, which also references other exceptions listed in 72(t)(2)(A) and the last phrase clearly states the 25% penalty does not apply. 

Submitted by David Mertz on Fri, 2016-08-19 10:48

  • The question is not whether a penalty for distribution from the SIMPLE IRA applies, the question is whether or not the beneficiary can transfer the account to a regular inherited IRA.  Q&A I-4 indicates that if within 2 years of the first contribution the account is transferred to an IRA that is not a SIMPLE IRA, the transfer is treated as a distribution from the SIMPLE IRA (which, due to the death of the owner, would not be subject to penalty) and a regular contribution to an IRA (which is not permitted to be made to an inherited IRA).  This implies that the transfer within 2 years of the first contribution to the SIMPLE IRA would have to be to an inherited SIMPLE IRA, from which the beneficiary can take penalty-free distributions.
  • Of course the reason for the prohibition on transferring a SIMPLE IRA to a regular IRA within 2 years of the first contribution is to prevent someone subject to the 25% early-distribution penalty from reducing that to a 10% early-distribution penalty.  Since distributions from an inherited SIMPLE IRA would not be subject to penalty, it seems logical that there should be no restriction on moving it to a regular inherited IRA.  However, Notice 98-4 provides no exception to the Q&A I-4 rule for SIMPLE IRA accounts of owners who have died, even though such an exception would be reasonable.

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