2 Year Rule with SIMPLE IRAs? Why?
Why is it that SIMPLE IRA plans require the 2 year account requirement before a participant can roll out their assets without additional penalty &/or roll into the account from a qualified retirement plan other than a SIMPLE IRA (such as a 401(k) plan)?
What is/was the basis for this rule? What is the rationale for this?
Permalink Submitted by John Peterson on Thu, 2017-04-13 15:54
Because your Congress in its infinite wisdom decided that the 72(t) 10% early distribution penalty should be bumped to 25% for SIMPLE distributions within the first 24 months after the account is opened and to track that possibility the $$ can’t be rolled out of the SIMPLE during that period.It’s also the reason you have to put SIMPLE deposits into SIMPLE IRAs and can’t make them into TIRAs.
Permalink Submitted by Alan - IRA critic on Thu, 2017-04-13 17:43
For an employee with a 5305 SIMPLE held at a designated financial institution (DFI) where the fees are almost always excessive, there is a partial solution. In the first two years when the employee can only roll out to another SIMPLE IRA the employee can establish a “transfer SIMPLE IRA” at another institution and the DFI must offer a transfer to the other SIMPLE without fees or penalty. Very few employees know this, and very few are willling to put forth the effort to transfer the funds. Most just wait for the 2 years to pass.