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SIMPLE IRA Question
Old 01-23-2007, 09:12 PM   #1
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SIMPLE IRA Question

Need your help. Daughter recently quit a job where she had a SIMPLE IRA. At job less than two years and account less than $1K. My understanding from IRS website that, to avoid any taxes and early w/d penalty, it can be rolled over to another IRA only after at least two years since contributions began. The plan admin. has given her several choices but made it clear that can't leave in their acct. (since under $5K) until that two year period passes. The only other applicable options are to rollover or to take distribution, both of which trigger the 25% penalty on early w/d.

Is this right or am I missing something? Seems like either way she goes on this, will lose $ to either taxes or penalties. Thanks.
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Re: SIMPLE IRA Question
Old 01-23-2007, 09:25 PM   #2
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Re: SIMPLE IRA Question

A rollover does not trigger a penalty. See IRS publication number 575, under the heading Rollovers. The best way to do it is a "trustee to trustee" transfer directly to another trustee such as a mutual fund company. (The IRS refers to this as a "direct rollover option") However, with only 1k, she may have a problem meeting minimum balance requirements.
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Re: SIMPLE IRA Question
Old 01-23-2007, 09:44 PM   #3
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Re: SIMPLE IRA Question

Just tell her, Not to take possession of the money. Have her former employer do a trustee to trustee transfer. ( As mentioned in an earlier post. )

Your (Her) local bank could assist her with this and probably wouldn't have any restrictions on any minimum balance required. I think there is a 60 day time limit, to complete this transaction.

Hope this helps.
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Re: SIMPLE IRA Question
Old 01-23-2007, 09:50 PM   #4
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Re: SIMPLE IRA Question

I'm reading from IRS Pub. 590 under the two-year rule (pg. 67) that says to qualify as a tax-free rollover during the first two years it must be a rollover to another SIMPLE IRA. After the two years from first contribution, a tax-free rollover must be made to an IRA (other than SIMPLE) or other qualified plan.

So if plan admin won't let her keep the money in until the two years are up and she doesn't have the option of another SIMPLE IRA plan, than there can't be "tax-free" rollover in this case. What other option is there but to take the $, pay taxes on it and therefore be subject also to an early w/d penalty of 25%?

I know this may not be a big deal, but am trying to get her started right on FIRE and am stuck on this. Maybe just bite the bullet, and have her open a Roth IRA with whatever is left from the SIMPLE one.
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Re: SIMPLE IRA Question
Old 01-24-2007, 09:19 AM   #5
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Re: SIMPLE IRA Question

I wasn't aware of that 2 year rule for SIMPLE IRAs. Why can't she just leave it in the SIMPLE IRA until the 2 years are up, and then move it to an IRA penalty free? If the answer is that the administrator said she can't, I wouldn't just accept that at face value. I am not sure they can force her to take a distribution if she doesn't want to. Maybe they can, but I wouldn't just take their word for it.

Obviously it's easier for them to get rid of such a small account for accounting reasons, it makes their life easier, but it's not in your daughter's best interest to take a distribution until 2 years has passed, so I would tell her to tell them that she doesn't want the distribution now, and she will roll it over to an IRA when 2 years is up so she can avoid the 25 percent penalty, and then see what they do. They might decide not to fight and just go along with it. Maybe telling her that she "can't" keep the money in their plan is just a way to pressure her to take it out so their life is easier, and maybe she really can keep it there. I would advise her not to sign anything that agrees to a distribution now.

UPDATE: I was very curious about this, and I did some research, and it appears that the plan sponsor is allowed to do a forced distribution for accounts less than $1,000.

http://reish.com/publications/articl...?ARTICLEID=527
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Re: SIMPLE IRA Question
Old 01-24-2007, 09:35 AM   #6
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Re: SIMPLE IRA Question

Quote:
Originally Posted by JustCurious
I wasn't aware of that 2 year rule for SIMPLE IRAs. Why can't she just leave it in the SIMPLE IRA until the 2 years are up, and then move it to an IRA penalty free? If the answer is that the administrator said she can't, I wouldn't just accept that at face value. I am not sure they can force her to take a distribution if she doesn't want to. Maybe they can, but I wouldn't just take their word for it.

Obviously it's easier for them to get rid of such a small account for accounting reasons, it makes their life easier, but it's not in your daughter's best interest to take a distribution until 2 years has passed, so I would tell her to tell them that she doesn't want the distribution now, and she will roll it over to an IRA when 2 years is up so she can avoid the 25 percent penalty, and then see what they do. They might decide not to fight and just go along with it. Maybe telling her that she "can't" keep the money in their plan is just a way to pressure her to take it out so their life is easier, and maybe she really can keep it there. I would advise her not to sign anything that agrees to a distribution now.
They can force a distribution even if she doesn't sign anything. After a point, they will just send her a check.
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Re: SIMPLE IRA Question
Old 01-24-2007, 09:44 AM   #7
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Re: SIMPLE IRA Question

Martha, it turns out that you are right. From what I can determine based upon some very quick research, if the balance is below $1,000, the plan sponsor can force a distribution. If the balance is between $1k and 5k, they are required to rollover the balance to an IRA, and if the vested balance is greater than 5k, they must allow the balance to remain in the plan until the participant directs a transfer.

I am not a tax expert, so if I am wrong, I am open to be corrected by someone who is a tax expert.

http://reish.com/publications/articl...?ARTICLEID=527

http://www.lfg.com/lfg/rfs/docs/pdf/...nouncement.pdf
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Re: SIMPLE IRA Question
Old 01-24-2007, 10:55 AM   #8
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Re: SIMPLE IRA Question

I had one of these. IRAs are "self owned" and don't have any admin for the employer. I left mine in the same account for the two years (from the date of the first contribution). But maybe you can open up another Simple IRA at a brokerage house, roll it in, then move it after the time has passed.

I'd be shocked if they can force a distribution on an IRA, that is a way different animal than a regular qualified plan. Since they are individually owned, I thought it just can't take any more contributions. I've never seen that happen.

Sarah
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Re: SIMPLE IRA Question
Old 01-25-2007, 01:57 PM   #9
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Re: SIMPLE IRA Question

Quote:
Originally Posted by mclesters
I'd be shocked if they can force a distribution on an IRA, that is a way different animal than a regular qualified plan. Since they are individually owned, I thought it just can't take any more contributions. I've never seen that happen.

Sarah
Sarah, the sponsor of a qualfied plan can force a distribution if the vested balance is below 5k. Also, if the vested balance is below 1k, the plan sponser can not only force a distribution, but they can cut a check and send it to the participant.
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Re: SIMPLE IRA Question
Old 01-25-2007, 02:54 PM   #10
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Re: SIMPLE IRA Question

She can go to Fidelity (or wherever) and establish a SIMPLE IRA. Then she can do a rollover, satisfying the rule of it being a SIMPLE->SIMPLE rollover. Wait 2 years and then roll it to a regular IRA. Voila!
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Re: SIMPLE IRA Question
Old 01-25-2007, 03:55 PM   #11
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Re: SIMPLE IRA Question

Right, I know about the rule for q-plans, but the SIMPLE is supposed to be a different animal altogether, a self-directed IRA account that has employer contributions. That is why I'd be surprised if they could distribute/close on an account they don't "own".

Sarah
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