Simple IRA 2-year rule

Submitted by Jeff Beebe on Fri, 2017-10-13 17:48

A client participated in a Simple IRA with their previous employer. They rolled it over to the new employer’s Simple IRA. Does the 2-year rule begin on the date of the first contribution to the previous employers plan, or the current employers plan?



Submitted by Alan - IRA critic on Fri, 2017-10-13 19:38

The current employer’s plan. The current plan is not going to track the two year holding period for prior plans, and will code their 1099R Box 7 to only recognize the date of the first contribution to their own plan. In effect, the holding period in the former plan is erased with the rollover.

Submitted by William Tuttle on Sat, 2017-10-14 04:08

  • The 2-year period starts on the date of the first contribution. A rollover does not change this date.
  • The second employer may but is not required to use the first date for determination of the 2-year period.
  • If the 2nd employer uses only the first contribuiton date of their employment and a distribution/rollover occurs before their 2-year period has elapsed. they will report this as an early distribution on the 1099-R.
  • This does not cause the previous holding period to be erased. While this 1099-R will indicate an early distribution, it is in fact not an early distribution.
  • Anyone having one or more subsequent SIMPLE IRA employers should proactively determine if the new employer’s plan will adjust the first distribution date provided documentation and do this. 
  • If the new employer’s plan will not do this, the taxpayer will receive a 1099-R even when they have exceeded the 2-year period from the date of the first contribution from their first employer. They should include a detailed explanation statement with their tax return. This statement should indicate the date of the first contribution to the first employer and any distributions/rollovers.
  • This may still result in a CP-2000 Notice, but a detailed response with evidence of the first contribution date and any distributions/rollovers, should resolve this with no taxes or penalties due.
  • If the client has no serious need to withdraw or rollover the SIMPLE IRA and will get distressed by a possible CP-2000 notice even if alerted to the possibility. Then they probably should wait for the second 2-year period.

Submitted by David Mertz on Sat, 2017-10-14 12:43

spiritrider, I can find no IRS guidance that supports your position in general.  IRS Notice 98-4 Q&A.I-5, Article IV, paragraph 6b, of Form 5304-SIMPLE and Form 5305-SIMPLE, and section 72(t)(6) of the tax code all combine to suggest that the 2-year period will only carry over to the receiving SIMPLE IRA account if the original SIMPLE IRA account was established under a plan maintained by the same employer, not one established under the plan of a different employer.  In the case in question, it appears that two different employers are involved.

Submitted by William Tuttle on Sat, 2017-10-14 17:34

  • I am on very firm ground here. You are looking at it from the wrong direction. There is nothing in IRC 408(p), 72(t)(6)) or 98-4 that refers to “the individual’s employer” as their current employer, which they certainly could have if this is what they intended. In fact it is very clear from H-5 that they are refering to any employer. including previous employers.
  • H-5  Yes. A SIMPLE IRA trustee is required to report on Form 1099R whether a distribution to a participant occurred during the 2-year period described in I-2. A trustee is permitted to prepare this report on the basis of its own records with respect to the SIMPLE IRA account. A trustee may, but is not required to, take into account other adequately substantiated information regarding “the date on which an individual first participated in any SIMPLE IRA Plan maintained by the individual’s employer.” See I-2 on the effect of distributions within this 2-year period.
  • I-2  Generally, the same tax results apply to distributions from a SIMPLE IRA as to distributions from a regular IRA (i.e., an IRA described in 408(a) or (b)). However, a special rule applies to a payment or distribution received from a SIMPLE IRA during the 2-year period beginning on “the date on which the individual first participated in any SIMPLE IRA Plan maintained by the individual’s employer” (the “2-year period”).
  • If in H-5 the employer can take into account other adequately substantiated information regarding the start of the 2-year period. Then the start of the 2-year period as indentically described in I-2, must refer the date on which the first contribution was made to any employer. Whether the custodian chooses to take into account the date from a previous plan or not, what a custodian reports on a 1099-R is for information purposes to the IRS and the taxpayer. It does not iretreivably establish tax liability.
  • I have help someone respond to a CP-2000 regarding this issue. The IRS replied within a couple of months that the issue was closed with no taxes/penalties due.
  • Learning from this, I have helped others report this on their Form 1040 as a non-taxable rollover and submit an explanation statement. This was long enough ago for them to have received a CP-2000. I have not heard anything from them regarding any CP-2000 notice. Now, I know that no news does not necessarily mean good news, but it is an anecdotal data point.

Add new comment

Log in or register to post comments