SIMPLE IRA Withdrawal & Transfer Rules

February 25, 2017

Note from OKC APA: Last month we covered retirement plans withdrawals and transfers. This month we are talking about SIMPLE IRA plan changes. This info can be very help to payroll pros at small employers and non-profits!

 

Withdrawals from SIMPLE IRAs

 

Generally, you have to pay income tax on any amount you withdraw from your SIMPLE IRA. You may also have to pay an additional tax of 10 percent or 25 percent on the amount you withdraw, unless you are at least age 59½ or you qualify for another exception.

 

Additional Taxes

 

10 percent tax

You have to pay a 10 percent additional tax on the taxable amount you withdraw from your SIMPLE IRA if you are under age 59½ when you withdraw the money unless you qualify for another exception to this tax. In some cases, this tax is increased to 25 percent.

 

25 percent tax

The amount of the additional tax you have to pay increases from 10 percent to 25 percent if you make the withdrawal within two years from when you first participated in your employer's SIMPLE IRA plan.

 

Exceptions to additional taxes

 

You don’t have to pay additional taxes if you are age 59½ or older when you withdraw the money from your SIMPLE IRA. You also don’t have to pay additional taxes if, for example:

  • Your withdrawal is NOT more than:

    • Your unreimbursed medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if your spouse is age 65 or older),

    • Your cost for your medical insurance while unemployed,

    • Your qualified higher education expenses, or o The amount to buy, build or rebuild a first home.

  • Your withdrawal is in the form of an annuity.

  • Your withdrawal is a qualified reservist distribution.

  • You are disabled.

  • You are the beneficiary of a deceased SIMPLE IRA owner.

  • The withdrawal is the result of an IRS levy.

 

Transfers from SIMPLE IRAs

 

You may be able to transfer money in a tax-free rollover from your SIMPLE IRA to another IRA (except a Roth IRA) or to an employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan). However, during the two-year period beginning when you first participated in your employer's SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Otherwise, you are considered to have withdrawn the amount transferred and you will have to:

  • include the amount in your gross income, and

  • pay an additional 25 percent tax on this amount, unless you are at least age 59½ at the time of the transfer or you qualify for another exception (see above) to the additional tax.

After the two-year period, you can make tax-free rollovers from SIMPLE IRAs to other types of non-Roth IRAs, or to an employer-sponsored retirement plan. You can also roll over money into a Roth IRA after the two-year period, but must include any untaxed money rolled over in your income.

 

Transfers to SIMPLE IRAs

 

Previously, a SIMPLE IRA could only accept transfers from another SIMPLE IRA plan. A new law in 2015 now allows a Simple IRA to also accept transfers from traditional and SEP IRAs, as well as from employer-sponsored retirement plans, such as a 401(k), 403(b), or 457(b) plan. However, the following restrictions apply:

  • SIMPLE IRAs may not accept rollovers from Roth IRAs or designated Roth accounts of employer-sponsored plans.

  • The change applies only to rollovers made after the two-year period beginning on the date the participant first participated in their employer’s SIMPLE IRA plan.

  • The new law only applies to transfers to SIMPLE IRAs made after December 18, 2015, the date of enactment.

  • The one-per-year limitation that applies to IRA-to-IRA rollovers also applies to rollovers from a traditional IRA, SIMPLE IRA, or SEP IRA into a SIMPLE IRA.

Helpful links information from IRS.gov

 

SIMPLE IRA Plan FAQs – information on SIMPLE IRAs, including the rules on withdrawing and transferring money.

 

Retirement Topics – Exceptions to Tax on Early Distributions – describes when you don’t have to pay additional taxes on money you withdraw from your SIMPLE IRA.

 

Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) – information on taxes you have to pay on withdrawals from IRAs.

Don't have a SIMPLE IRA? Read about transferring from other retirement account types from last month's blog post Leaving Your Job? Don't Forget Your Retirement Plan!

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