SIMPLE IRA 2 Year Rule and Active Participant

Submitted by Karen Elise Kilbride on Mon, 2018-05-07 20:11

On 2 year rule for SIMPLE IRA, investor holds two SIMPLE IRA accounts, one which was opened with transfer from older SIMPLE IRA which still receives all employer contributions and the second SIMPLE IRA account which is newer dated Feb 2016 and has just received transfers from older SIMPLE IRA account and no employer contributions. How does 2 year rule apply to newer SIMPLE IRA account with no actual employer contributions received? Does the two year rule begin then from date of transfers in from second older SIMPLE IRA account because money can be traced back to earlier employer contribution?

Also, same investor wants to do Trustee to Trustee transfer from newer SIMPLE IRA to Traditional IRA. Employer SIMPLE IRA active and he is participant under 59.5.



Submitted by Alan - IRA critic on Tue, 2018-05-08 02:54

The 2 year holding period starts from the date of the first contribution made to the SIMPLE IRA of the employer. If such contributions are transferred to a transfer SIMPLE IRA, per Q H-5 of Notice 98-4, the custodian of the transfer SIMPLE IRA is allowed, but not required to obtain data regarding the date of the first contribution made to the SIMPLE IRA still receiving the contributions. The date of the first transfer to the transfer SIMPLE IRA does not result in any reset of the original 2 year holding period. However, if the transfer SIMPLE Custodian is not willing to accept data regarding the actual first contribution date and issues a 1099R accordingly with code S, the SIMPLE IRAQ owner can still report the rollover and make an explanatory statement with their tax return. I would recommend submitting some documentation to the transfer SIMPLE custodian that the custodian would accept as the first contribution date.

Submitted by William Tuttle on Tue, 2018-05-08 03:33

  • The two year period begins with the first date employer contributions were made to any SIMPLE IRA. Employer contributions include employee contributions. I have not seen any indication if rollover contributions qualify.
  • This means that all contributions including those rolled over to the new plan are two-year qualified, but the new custodian may or may not consider the plan 2-year qualified.
  • From IRS notice 98-4 “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.”
  • So your question is best directed to the second custodian. Will they consider the rollover contribution as a first participation date, or will they accept substantiated information of the first participation date from the first custodian. You would think the mere date of the rollover would suffice, because obviously the first contribution date had to occur before the rollover, but who knows.
  • Even if, the second custodian issues a 1099-R with taxable income and code S in box 7. You could complete your return with Form 1040 Line 15b not reflecting the taxable income and an explanation and proof of the first contribution date of the first custodian.
  • Talk about replying at the same time Alan. You beat me by about 30 seconds.

Submitted by Karen Elise Kilbride on Tue, 2018-05-08 14:04

Thank you for your detailed responses.  Also, same investor wants to do Trustee to Trustee transfer from Transfer SIMPLE IRA (the newer IRA) to Traditional IRA. Employer SIMPLE IRA in originated separate IRA account is still receiving contributions and he is participant under 59.5.  If new custodian accepts Transfer SIMPLE IRA and date of funding as 2 year plan qualified this can occur and remain tax qualified correct? Thank you

Submitted by Alan - IRA critic on Tue, 2018-05-08 16:02

Yes, that is correct. If the custodian of the transfer SIMPLE IRA accepts documentation of completion of the 2 year waiting period, the transfer to the TIRA would be a non reportable direct transfer. However, if the transfer SIMPLE custodian will NOT accept the documentation, they should refuse a transfer and would issue a 1099R reportable distribution coded S that the investor would have to explain to the IRS regarding the status of the 2 year period. Also, if the SIMPLE Custodian issues a distribution, then the one rollover limitation could come into play since this would then become a 60 day rollover, and only one is allowed in a 12 month period. The solution is to make it clear to the transfer SIMPLE IRA custodian that there is to be no distribution or transfer if that custodian does not agree to treat the transfer as within the 2 year waiting period.

Submitted by Karen Elise Kilbride on Tue, 2018-05-08 16:33

Thank you!

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