simple ira transfer to ira rollover

Submitted by Larry Freie on Wed, 2011-06-01 15:30

Client has a Simple IRA that he and she is contributing to..owners of the company.. portion of the dollars are at a mutual fund company that they contribute to…and another portion of the simple ira dollars are at a another money manager firm…they do not contribute to this portion of the plan assets….the Simple IRA was started 8 years ago…they orginally were sending 100% of their contributions to the mutual fund company and then a couple of years later they transfered a portion of these accumulated dollars to a money managed account under the titled account yet as a Simple IRA..but are not contibuting to this portion of the account..they would like to transfer both the mutual fund dollars and the money managed dollars to a another money manager who does not hold simple ira dollars and invest with this money manger and continue to contribute dollars to thier current simple ira/custodian account…they want the bulk of their simple ira dollars manged by this particular money mangaer…the transfer would have to be classified as a IRA Rollover???…as the new money manager doesnt ‘hold’ simple ira dollars…can they transfer the simple ira dollars to a ira rollover account..and stil contribute to the original simple ira account..they are 66, 100% owers of their business..have approximately 15 people contributing to the companies simple ira..all to the one orginal mutual fund…they set the simple plan up under irs 5304 so they could sent simple ira dollars where ever…??? await your follow up thoughts…answers…thank you



Submitted by Alan Spross on Wed, 2011-06-01 22:21

Under the 5304, each employee can direct the contributions to the custodian of their choice. If the client wants to change over to a 5305 and direct all the SIMPLE IRA accounts to their choice of custodian, then they must make the change effective January 1, with appropriate notice to the employees before their 60 day election period starting 11/2. That means that the Notices should go out no later than early October.

Transfers of the existing accounts must be done without cost or penalty to the employee as long as the transfer is made to the new custodian. There is also the 2 year rollover restriction under which the account cannot be rolled over to a non SIMPLE IRA in the event an employee did not want to leave their current custodian.

I can’t tell you if there is a way for the employees who want to use the services of the money manager to have the manager advise them while leaving the current SIMPLE IRA custodians in place. It might be possible, but would probably add expenses and complexity, particularly since employees who do not like the arrangement can wait out their two years and then roll the funds out of the SIMPLE to their traditional IRA or Roth IRA accounts. That would leave only temporary balances in their SIMPLE IRAs until the employees did periodic transfers out. Balances would not build up enough for the money managers to reduce their expenses if they are based on assets under management. Perhaps the money manager has been able to put together this structure before with some success, but I would not want to be the first client providing them with that experience.



Submitted by Larry Freie on Thu, 2011-06-02 12:42

your comments focus on cost of transfer…which that is not a problem we are dealing with..i would appreciate your additional comments…the 5305 states..as you commented… the employee can go to ‘whom ever custodian is desired…this particular custodian does not ‘hold’ Simple IRA assets..does hold IRA assets…can the employer in this case transfer his Simple ira dollars to this custodian and use a IRA rollover title on this new account…to access this new custodian..and then continue to contribute to his current simple ira custodian as has been the normal process…await your thoughts…



Submitted by Alan Spross on Thu, 2011-06-02 19:36

It’s the 5304 which they currently have under which either the employer or the employees can use any custodian they wish for their SIMPLE IRA. Either the employer (for his own account) only and the employee can roll funds into a TIRA account any time they wish but AFTER the 2 year waiting period from the date each made their first salary reduction SIMPLE IRA contribution. That would allow current SIMPLE IRA contributions to go into the existing SIMPLE IRA, but then be rolled out by the employee. Due to the one rollover limit per IRA, if the employee or employer wants to roll out funds more frequently than annually, they must a direct trustee transfer to avoid the one rollover rule.

The client then wants to keep the SIMPLE IRA custodian as is, just have everyone transfer the funds out of the SIMPLE ASAP after the contributions were made to a traditional IRA for which the money manager is the custodian? If so, OK after the 2 year waiting period.



Submitted by Alan Spross on Thu, 2011-06-02 22:10

Employer or any of the other employees that wanted to could do the transfer to a traditional IRA – after the two year waiting period for each one. Employer may have 8 years, but there might be some employees that have not been contributing 2 years yet, and they cannot transfer out of the SIMPLE IRA.

I did not understand what they intend for the other employees. They cannot cut off contributions for the other employees, nor can they restrict the other employees from tranferring out of their SIMPLE accounts to the traditional IRA custodian of their choosing.

The only control over the other employees they could wield would be if they adopted a 5305 next January requiring that all the SIMPLE IRAs be changed to the custodian of their choice. But even if they did that, the employees could still transfer all the money out of their SIMPLE IRA after 2 years.

So I think that it is only the owner and spouse that wants to transfer funds out of the current SIMPLE to a TIRA, and they can certainly do that. Once they transfer funds to a traditional IRA, they can also make traditional IRA contributions to that same IRA if they wish, but they may not be able to deduct the traditional IRA contribution because they are still covered by the SIMPLE as well.

Not sure if that answers your questions.



Submitted by Larry Freie on Fri, 2011-06-03 12:19

Alan…your comments greatly appreciated..are thier any IRS ‘policing’ efforts that once we consumate the transfer of the dolars from the SIMPLE IRA TO THE ROLLOVER IRA…that would raise a ‘red flag’ and produces a IRS audit etc????



Submitted by Alan Spross on Fri, 2011-06-03 17:55

No, because rolling out of a SIMPLE IRA to a TIRA is routine and clearly allowed. The only pitfall is that two year waiting period that applies separately to each SIMPLE IRA owner. If one of the SIMPLE owners does not meet that requirement the 1099R is coded to show that a special penalty of 25% applies for an early distribution instead of 10% and worse yet, the distribution is taxable.

I take it that the owner’s are the ones that want to transfer to the TIRA, and that other employees may want to just keep their SIMPLE IRA contributions where they are. That is no problem and the employees cannot be pressured to choose any particular custodian or to move their funds at all. The only way to do that would be to change the entire SIMPLE program over to a 5305 with the only custodian option being the one selected by the owners.



Submitted by Larry Freie on Thu, 2011-06-09 14:40

a final review of prior email commentary…owners are ready to transfer their simple ira assets to a IRA account…owners also want to continue to contibute to thier currnet simple ira account..( thier objective is to tranfer thier current simple ira assets into a more managed portfolio…rather than retainng these dollars in a mutual fund investment..the new ira custodian does not wish to hold simple ira assets..owners do not plan to change their 5305 so as each employee can direct their simple ira contribution where ever)…thier curent IRA document is a 5305 prototype…thier custodian ( per my phone visit) will alllow them to transfer the money…( plan was started in Oct 2004)…the only reason for the 5305 is for the mutual fund company to ‘link’ all of their accounts together for rights of accumulation sales charges ( if the protype was the 5304 ..then each employee accounts are not linked)…the owners wish to do this for themselves only…rest of employees wil continue to contribute to thier simple ira plan as has been established…so..assume them that the transfer from the simple ira can happen using a ira transfer characterization…??? as you have said..yes…the one question that i wanted also readdressed…the owners do want to continue contributing to the curret ira custodian account they have set up…assume they can continue to do this per your prior email communication…??? Current custodian does not want to advise on this additional contribution question…just wanted to reaffirm your prior communication that this can be done…your help is greatly appreciated…am i too assume that your organization is in the Tax Advisory role and that your communication via the email is accurate and can be used if IRS were to provide some degree of opposition?

will await your response..thank you..



Submitted by Alan Spross on Thu, 2011-06-09 18:11

What has changed from your earlier posts is that they have a 5305 rather than a 5304, but this does not matter since the owners do NOT plan any changes to the SIMPLE IRA custodian currently used. All they plan to do is to transfer funds out of the SIMPLE IRA to a traditional IRA after the 2 year waiting period. Any employee can do this, not just the owners. This is clearly stated on p 11 of Pub 560 (Distributions) and by cross reference to p 71 of Pub 590, “Your employer cannot restrict you from taking distributions from a SIMPLE IRA”. Also see “Transfers and Rollovers Exception” – “After the two year period, amounts in a SIMPLE IRA can be rolled over or transferred (direct trustee transfer) tax free to an IRA other than a SIMPLE IRA,…etal”.

There is no reason for the IRS to have a problem with this. The two year rule applies separately to each employee or owner.

Posts made here do not have any binding authority on the IRS, but this issue is quite clear as long as I have correctly understood what they propose to do.



Submitted by Larry Freie on Thu, 2011-06-09 21:03

one final clarification that you didnt address…employer wants to continue contributing to the Simple IRA even after the dollars have been transferred to a IRA…need to be reasssured this is ok..and no restrictions in doing so..?



Submitted by Alan Spross on Thu, 2011-06-09 21:55

No problem at all. It is very commonplace that employees start rolling funds out of a SIMPLE IRA as soon as they can, ie as soon as the 2 year waiting period is complete. New contributions can continue to be made to the SIMPLE IRA.

One caution though – the one rollover rule per 12 months continues to apply to SIMPLE IRAs as it does to TIRAs. Therefore, anyone doing these roll outs more often than once in a rolling 12 month period must use direct trustee transfers to move the funds instead of indirect rollovers.



Submitted by Larry Freie on Fri, 2011-06-10 11:45

thank you very much for your ongoing clarifications…very difficult to find proper legal answers…thank you…



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