Here’s a way to make your life simpler. If you have a SIMPLE IRA—a retirement plan common among very small business owners and their employees—there’s a line item in the $622 billion tax deal that applies to you. In the past, you could only roll over assets from a SIMPLE IRA to a SIMPLE IRA. Now you can roll over assets from other retirement plans, including traditional IRAs, to a SIMPLE. It’s a welcome simplification to the unwieldy retirement plan rollover rules.
“This was one of those rules that made no sense; it prevented SIMPLE IRA owners from transferring back and forth,” says Denise Appleby, a retirement plan consultant and founder of retirementdictionary.com. With SEP-IRAs, a similar plan, you could roll assets both ways, she notes. (For how a SIMPLE IRA can beat a SEP-IRA, see A Simple Way To Save For Retirement.)
The new rules will help people out there with SIMPLE IRAs and other types of retirement accounts (401(k)s, 457 plans, 403(b)s, SEP-IRAs and traditional IRAs) who want to consolidate accounts for various reasons. Why do a rollover? To simplify your life, save on fees, reduce account statements.
Here’s a scenario of someone the new SIMPLE rollover rules will help. 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. See Employers Dump 401(k)s Into IRAs Costing Ex-Employees Billions.
There’s one catch—just like you have to wait for two years after opening a SIMPLE account before you can transfer money out of it, you can’t transfer money in until you’ve had the account open at least two years. That’s a picky rule that none of the other retirement accounts have.
Also, if you’re trying to do the 401(k) to SIMPLE rollover, you might have to wait until your 401(k) plan is amended to allow it—despite the fact that the new rollover rule is effective Dec. 18, 2015, the day the tax deal was signed into law, says Larry Goldstein, an employee benefits lawyer with McGuire Woods. IRS guidance should make it clear whether all employer plans have to allow transfers to SIMPLEs or whether it’s up to the plan to allow it. That’s another bug in the retirement plan system—employers can be stingier than Congress when it comes to what’s allowed in the workplace retirement plan they sponsor.
One reason the new rules are welcome is that they help employees who have no other choice but to be in a SIMPLE, says Appleby. If that’s the plan your employer offers, you have to keep it open in order to receive the employer contribution. Here’s how it works: For 2016, you as an employer can make an employee contribution (yes, that’s for yourself) of up to $12,500 pretax, or $15,500 if you’re 50 or older. On top of that, as an employer you can also put in up to 3% of your net self-employment income. Basically, if you make $100,000, you can put in another $3,000 as an employer match. The match must be offered equally to any employee—including your spouse–who earns at least $5,000 a year. But if employees don’t sign up, you don’t have to put any money away for them.
Just because you can now do these rollovers doesn’t mean you should, says Gregory Steinbis, an enrolled agent in Morgan Hill, Calif. who along with his wife who works with him, has had a SIMPLE for years. “I wouldn’t bring things into my SIMPLE; I’d take them out,” he says. In fact, he recently rolled over $100,000 from his SIMPLE (it’s with American Funds) to a traditional IRA to buy an annuity. Before you rollover (either in or out), compare the investment line-up and fees for both accounts. For example, you might want to roll over a balance from a small employer 401(k) plan with high-cost investments into a SIMPLE IRA at Vanguard with low-fee index funds.
This is how the Joint Committee on Taxation explains the new rule in its technical analysis of the tax deal:
“The provision permits rollovers of distributions from employer-sponsored retirement Plans and traditional IRAs (that are not SIMPLE IRAs) into a SIMPLE IRA after the expiration of the two-year period following the date the employee first participated in the SIMPLE IRA (the two-year period during which the additional income tax on distributions from a SIMPLE IRA is 25 percent instead of 10 percent).”
And here is a link to the text of the tax deal.