Employers looking for greater employee choice and flexibility often opt for SIMPLE IRA plans as each dollar contributed by employees belongs solely to them. This makes the plan an appealing option when looking to provide their staff with more retirement savings options and flexibility.
The IRS provides two model plan documents to help you establish a SIMPLE IRA. Whichever document you select, any financial institution serving as the trustee will have certain ongoing responsibilities.
The Savings Investment Match Plan for Employees (SIMPLE) is an IRA-based retirement savings plan that allows employees to defer salary into an account and earn employer matching contributions. The IRS imposes various regulations regarding SIMPLE plans to ensure compliance with federal law; one key area involves how and when rollovers may occur within a SIMPLE IRA account.
Direct rollover occurs when assets from a SIMPLE IRA are moved directly from one financial institution to another through either trustee-to-trustee transfer or electronic funds transfer, without creating an event which triggers withholding taxes – meaning your investments in the new account continue growing tax deferred until later withdrawal.
Notably, direct rollover from a SIMPLE IRA is only permitted after two years have elapsed since an employee first participated in the plan; any distribution taken prior to this timeframe would incur taxes and an early withdrawal penalty (for those under 59.5).
The Protecting Americans from Tax Hikes Act of 2015 introduced new provisions pertaining to SIMPLE IRAs that expanded their rules and regulations, specifically Section 306 which amended Internal Revenue Code Section 408(p). This issue snapshot explains these changes.
When moving assets from a SIMPLE IRA to another financial institution, two methods are permissible under its rules and regulations: trustee-to-trustee transfer or electronic funds transfer. Both must comply with SIMPLE IRA regulations but you should ensure the receiving institution has all of your accurate financial details as well as account numbers of both source and destination accounts as well as use an approved IRA form when initiating this transfer.
Which plans can I transfer directly into SIMPLE IRAs?
A SIMPLE IRA accepts direct rollovers from traditional and SEP IRAs as well as most employer-sponsored retirement plans such as 401(k), 403(b) and 457(b). Unfortunately, Roth IRAs or designated Roth accounts cannot currently be directly transferred over.
The IRS provides a chart to assist advisors working with clients seeking to maximize their retirement savings. This tool can also serve as an excellent way to aid clients when working to expand their IRA savings.
Though SIMPLE IRAs provide an ideal retirement solution for small-business owners, the time may come when you and your clients must alter how they save for their futures. Consult with financial advisors and retirement specialists regarding what type of plan would best meet their needs; during this process you should also review plan documents to see whether an amendment may be necessary; be sure to monitor trustee/financial institution to make sure they meet legal requirements while charging reasonable fees for services rendered.