SIMPLE IRA to Roth IRA Conversion
We have a client who has made max contributions to their SIMPLE IRA for 2012. Their business income has been lower than projected, and the client would like to convert some of the SIMPLE contributions to Roth IRA contributions.
(1). Is this conversion even possible?
(a). Can a Roth Conversion from a SIMPLE be executed?
(b). Do SIMPLE contributions reduce eligible contributions to a Roth? —> I have called the IRS twice about this and received two completely different responses.
(2). Assuming the conversion is possible, will there be a penalty?
(a). The client is not 59½
(b). Will the converted funds violate the 2-year holding period for SIMPLE funds? The SIMPLE has been open more than two years, but as noted, contributions were made this year.
(3). Can the client report the contributions as an over-contribution and pay tax/penalty only on the gain?
Permalink Submitted by Alan Spross on Thu, 2012-11-29 21:42
1) It’s permissible after the 2 year SIMPLE IRA waiting period for distributions. 2 years is measured from the date of the first SIMPLE Contributions to the plan.
a) Conversion can be made directly from the SIMPLE IRA to a Roth IRA.
b) SIMPLE contributions do not reduce regular Roth IRA contributions. The SIMPLE contributions is some cases may reduce modified AGI that is otherwise too high for Roth IRA contributions.
2) There is no penalty as long as the 2 year waiting period is met. If not, there are major problems including a 25% penalty plus ordinary income tax and no rollover.
2b) As long as the 2 year waiting period from the first contribution is met, later contributions can be converted or rolled over without any additional waiting period. That includes the current year contributions. If the Roth conversion is recharacterized, the transfer can go back to the SIMPLE IRA or to a traditional IRA.
3) Don’t follow this question. Are the current year SIMPLE contributions excess deferrals?