SIMPLE IRA rules change

SIMPLE Retirement Plans Get an Upgrade with New Tax Deal

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With the new $622 billion tax deal that Congress passed into effect at the end of 2015, SIMPLE IRAs received a change in rules that now allows them to play a similar game as other IRA account structures. In the past, retirement account holders could only roll over or transfer  assets between SIMPLE IRA accounts (from a SIMPLE to a SIMPLE); while other account types could freely roll over funds between accounts (from a Traditional IRA to a Roth IRA, etc.). The new tax deal allows SIMPLE IRAs to roll over assets from any other retirement account type. This freedom will be a welcome change for retirement investors.
There are several reasons IRA owners may seek to consolidate accounts. Forbes.com lists just a few:

“Say you set up an IRA at Bank A worth $2,000 and another IRA at Bank B, worth $4,000, a while back. Now you work at a company with a SIMPLE. You could roll over the IRAs into the SIMPLE.”

“Or maybe you accumulated a small 401(k) plan balance at an employer where you worked for a short time. Roll it to a SIMPLE and get it working for you. An unclaimed $1,000 401(k) account could be reduced to zero in less than a decade.”

Why do employers choose SIMPLE accounts for their employees? SIMPLE IRAs allow contributions from both the company and the employee. The employer can choose to match up to 3% of each employee’s compensation, or contribute 2% for every eligible employee. Employees can choose whether or not they want to contribute in any given year. SIMPLE IRAs are more popular with smaller companies, as they feature low start-up and administrative costs.

The new tax deal does have a time-sensitive stipulation for transferring funds into a SIMPLE IRA, which mirrors the long-established rule that account owners must wait two years after opening a SIMPLE IRA account before transferring money out of the account. This two-year waiting period is unique to the SIMPLE IRA account structure.

Because employers have the power to be picky about what is allowed by the retirement account that they sponsor, some 401(k) account holders may have to wait until their plan allows them to rollover their account into a SIMPLE IRA. As of now, it is not made clear by the IRS whether or not all employer plans have to allow transfers to SIMPLE IRAs.

Of course, just because retirement account holders can rollover funds between SIMPLE IRAs, doesn’t necessarily mean that they should. Compare the investment line-up and fees with your IRA provider before rolling over funds in or out of your SIMPLE IRA. Happy investing!
 
 

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