The rules for SIMPLE IRAs state that employees who participate in this type of tax-deferred retirement account may not transfer funds to another retirement plan for two years after opening a SIMPLE account.
What does this mean, though, if you leave the company within two years, but your new employer does not offer a SIMPLE IRA? Here's a look at how SIMPLE IRAs work and what you can do if you find yourself in this situation.
Key Takeaways
- Employees must wait two years from the time they open a SIMPLE IRA account before transferring those funds into another retirement plan.
- If you withdraw money from a SIMPLE IRA during the two-year waiting period, you may be subjectto a 25% early-distribution penalty.
- However, transfers or rollovers between two SIMPLE IRAs are exempt from the IRS's two-year rule.
- When the two years are up, you can move the assets from your SIMPLE IRA into an eligible retirement account via rollover, transfer, or Roth conversion.
Rules Governing SIMPLE IRAs
A SIMPLE IRA is an appealing tax-deferred retirement plan for businesses that have 100 or fewer employees. An employer sets up the plan with a financial institution, which then administers it. The paperwork is minimal—just an initial plan document and annual disclosures to employees. Startup and maintenance costs are low, and employers get atax deductionfor contributions they make for employees.
To participate in a SIMPLE IRA, employees must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union.
To open an account, the employee must fill out aSIMPLE IRA adoption agreement. Once the plan is established, employers are generally required to match each employee's contribution up to 3% of their salary. Or, instead of matching contributions, the employer can contribute 2% of salary for each employee.
If You Leave During the Two-Year Waiting Period
During the first two years of opening a SIMPLE IRA account,you may not transfer those assets into another retirement plan. This two-year period begins on the first day that your employer deposits a contribution to the SIMPLE account. Any distributions that you do take from a SIMPLE IRA during this two-year period are subjectto an early-distribution penalty of 25% if you are less than age 59½ at the time of the withdrawal.
There's one exception. The two-year waiting period does not apply to transfers or rollovers between two SIMPLE IRAs. So if you are no longer with the company that sponsored the SIMPLE IRA, you can either leave the assets where they are until the two-year waiting period is over, or you may roll over the assets to a SIMPLE at another financial institution.
If you have a SIMPLE IRA, your employer must allow you to hold your assets at another financial institution—which you may choose, if you wish.
After the Two-Year Period
When two years have elapsed, you may move your SIMPLE IRA to another eligible retirement plan by means of a transfer, rollover (including a direct rollover), or Roth conversion, whether or not you've remained with the company that sponsored the SIMPLE.
To accomplish the transfer, you would need to submit a SIMPLE IRA adoption agreement along with a copy of the Form 5304-SIMPLE or Form 5305-SIMPLE that the employer filled out to establish the SIMPLE IRA. The transfer can happen once the new account has been established.
FAQs
If You Leave During the Two-Year Waiting Period
What happens to your IRA when you leave a company? ›
When you have a 401(k) and you leave your job, it's generally best to move that money into a new plan. Since an IRA isn't tied to your job, there's no reason to move those funds if you switch employers.
Can I move my SIMPLE IRA to another company? ›
After the 2-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 2-year period, but must include any untaxed money rolled over in your income.
Can I close my SIMPLE IRA account? ›
To terminate a SIMPLE IRA plan, notify the financial institution that you will not make a contribution for the next calendar year and that you want to terminate the contract or agreement. You must also notify your employees that the SIMPLE IRA plan will be discontinued.
Is a SIMPLE IRA employer-sponsored? ›
SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts, is employer-sponsored. This means it is offered to employees through a business. These types of retirement plans are made specifically for small businesses with 100 or fewer employees.
Can I close my IRA and take the money? ›
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
How long does my employer have to deposit my SIMPLE IRA contribution? ›
Time limits for contributing funds
Employers must deposit employees' salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the employee would have received them in cash.
What happens to a SIMPLE IRA if I change jobs? ›
Employees can roll over SIMPLE IRA contributions and earnings tax free from one SIMPLE IRA to another. Employees can also make tax-free rollovers from a SIMPLE IRA to another type of IRA or to another employer's qualified plan after 2 years of beginning participation in the SIMPLE IRA plan.
How do I cash out my SIMPLE IRA? ›
If you decide to withdraw, contact your employer and explain that you would like to withdraw funds from your SIMPLE IRA. You can make a withdrawal at any time and still continue to contribute to the plan, even after you take some money out. Your employer will provide you with the required forms.
What are the rules for a SIMPLE IRA? ›
Choose a SIMPLE IRA Plan
- Employer is required to contribute each year either a: Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or. ...
- Employees may elect to contribute.
- Employee is always 100% vested in (or, has ownership of) all SIMPLE IRA money.
However, unlike traditional IRAs and most other retirement accounts, SIMPLE IRAs charge a 25% early withdrawal penalty if you take money out within the first two years of owning the account. You also have to wait two years if you'd like to roll your SIMPLE IRA funds over into a traditional IRA without paying any taxes.
What are the disadvantages of a SIMPLE IRA? ›
Are There Downsides to SIMPLE IRAs and SEPs?
- Employee limitations. SIMPLE IRAs can only be implemented at companies with 100 or fewer employees. ...
- Total annual contribution limits. ...
- Lower contribution limits than a 401(k). ...
- Mandatory employer contributions. ...
- No loans or Roth contributions.
Penalties for early withdrawal: If a SIMPLE IRA participant makes a withdrawal before age 59½, they're assessed with a 10% additional tax. If this withdrawal happens in the first 2 years of participation in the plan, the 10% tax is increased to a 25% tax.
What is a company sponsored IRA? ›
A payroll deduction individual retirement account (IRA) is an easy way for businesses to give employees an opportunity to save for retirement. The employer sets up the payroll deduction IRA program with a bank, insurance company, or other financial institution, and then the employees choose whether to participate.
Is an employer sponsored SIMPLE IRA the same as a 401k? ›
The differences between a 401(k) and a SIMPLE IRA
A 401(k) plan can be offered by any type of employer, but a SIMPLE IRA is designed for small businesses with 100 or fewer employees. Contribution limits for SIMPLE IRA plans are lower than traditional 401(k) plans. SIMPLE IRAs require an employer contribution.
What are the SIMPLE IRA rules for 2024? ›
In 2024, employees can contribute $16,000 into their SIMPLE IRA, which is up from the 2023 SIMPLE IRA limit of $15,500. Employees age 50 and older can contribute an extra catch-up contribution of $3,500 in both years.
Can I cash out an IRA from an old job? ›
Withdraw the balance
may have to pay an additional 10% early distribution tax if you aren't at least age 55 (59½, if from a SEP or SIMPLE IRA plan). If your withdrawal is from a SIMPLE IRA plan within two years of your first participation in the plan, the additional early distribution tax is 25%.
Can I keep my IRA forever? ›
With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older. The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k).
Does your IRA change if you switch jobs? ›
Roll it into a traditional individual retirement account (IRA) The pros: Because IRAs aren't sponsored by employers—you own them directly—you won't have to worry about making changes to your account should you change jobs again in the future.
What do you do with your retirement account when you switch jobs? ›
When you leave an employer, you have several options:
- Leave the account where it is.
- Roll it over to your new employer's 401(k) on a pre-tax or after-tax basis.
- Roll it into a traditional or Roth IRA outside of your new employers' plan.
- Take a lump sum distribution (cash it out)
