What to Do With Your SIMPLE IRA After Leaving Your Job?

A SIMPLE IRA can provide a straightforward way to save for retirement through employer contributions. When you change jobs, understanding your options for managing these funds is important to ensure your retirement savings continue to grow effectively. This article outlines paths for your SIMPLE IRA funds after employment ends.

Key Considerations Before Making a Decision

A specific rule, often called the “two-year rule,” significantly impacts how and when you can move your funds without incurring penalties. This rule begins on the date your employer first contributed to your SIMPLE IRA, and it dictates a period during which certain actions with your account are restricted. During this two-year period, any distributions or rollovers to a non-SIMPLE IRA are subject to a higher penalty tax, which is distinct from typical early withdrawal penalties. This rule is unique to SIMPLE IRAs and encourages long-term participation. Once this two-year period has passed, the funds in your SIMPLE IRA generally behave more like those in a traditional IRA, allowing for greater flexibility in transfers and rollovers.

Your SIMPLE IRA contributions and their earnings grow on a tax-deferred basis, meaning you generally do not pay taxes until you withdraw the money in retirement. Withdrawals made in retirement are typically taxed as ordinary income, based on your tax bracket at that time. If you take withdrawals before reaching age 59½, they are usually subject to an additional 10% penalty tax, unless a specific exception applies, such as disability or using the funds for a first-time home purchase.

Communicate with your current SIMPLE IRA custodian to understand the specific terms and conditions of your account. They can provide details regarding any administrative fees, available investment options, and the precise procedures for initiating transfers, rollovers, or withdrawals.

Options for Rolling Over Your SIMPLE IRA

Once the two-year participation period has concluded, you gain more flexibility in managing your SIMPLE IRA funds through various rollover options. Rollovers become a viable strategy after this initial period, allowing you to consolidate or diversify your retirement savings.

One common method is a direct rollover, also known as a trustee-to-trustee transfer. With this approach, your funds are moved directly from your SIMPLE IRA custodian to the new retirement account custodian without you ever taking possession of the money. This method helps avoid potential tax withholding and eliminates the risk of missing the 60-day deadline associated with indirect rollovers. To initiate a direct rollover, you typically contact the new custodian or plan administrator and complete their transfer forms, and then the institutions coordinate the movement of funds.

Alternatively, an indirect rollover, or 60-day rollover, involves you receiving a check for your funds, which you then have 60 days to deposit into a new qualified retirement account. This method carries more risks, including mandatory 20% federal income tax withholding from the distribution, which you must make up from other sources to roll over the full amount. If the entire amount is not deposited within the 60-day window, the unrolled portion can become taxable income and may be subject to early withdrawal penalties.

A common destination for a SIMPLE IRA rollover is a traditional IRA. This option allows your funds to remain tax-deferred, continuing to grow without immediate tax implications. Rolling over to a traditional IRA often provides a wider array of investment choices and potentially lower fees compared to some employer-sponsored plans. This consolidation can simplify your retirement portfolio management and offer greater control over investment decisions.

Converting your SIMPLE IRA funds to a Roth IRA is another option, though it involves a taxable event in the year of the conversion. When you convert pre-tax funds from a SIMPLE IRA to a Roth IRA, the entire amount converted is added to your taxable income for that year. While this means paying taxes upfront, future qualified withdrawals from the Roth IRA during retirement are entirely tax-free, including earnings. This strategy is often considered by individuals who anticipate being in a higher tax bracket in retirement than they are currently.

You may also roll your SIMPLE IRA funds into a new employer’s qualified retirement plan, such as a 401(k) or 403(b), if the new plan accepts rollovers from IRAs. This can be an attractive option for consolidating your retirement savings into a single account, simplifying administration. It may also provide access to certain plan-specific benefits or allow for future higher contribution limits typically available in employer-sponsored plans compared to IRAs.

Maintaining Your SIMPLE IRA with the Original Custodian

After leaving your job, you have the option to leave your funds in the existing SIMPLE IRA with the original custodian. This can be a straightforward path, particularly if the two-year rule has not yet passed, as it avoids any immediate need for transfers or potential penalties. Maintaining the account with a familiar institution provides continuity.

While convenient, keeping funds in the original SIMPLE IRA may present certain drawbacks. The investment options available within an employer-sponsored SIMPLE IRA might be more limited compared to a personal traditional or Roth IRA. Additionally, the fees associated with the account could potentially be higher than those you might find with other individual retirement accounts. You will not be able to make new contributions to the SIMPLE IRA once your employment with the sponsoring company has ended.

The funds held in your existing SIMPLE IRA remain accessible under the original account rules. Future withdrawals will be subject to the same tax treatment and penalty rules as they would have been had you remained employed. Eventually, you will also be subject to required minimum distributions (RMDs) from the account once you reach the applicable age, typically 73, as mandated by IRS regulations.

Taking a Withdrawal from Your SIMPLE IRA

Taking a direct withdrawal from your SIMPLE IRA involves specific financial consequences. To initiate a withdrawal, you will need to complete a distribution request form provided by your SIMPLE IRA custodian. This form will specify the amount you wish to withdraw and your preferred method of receiving the funds.

All withdrawals from a SIMPLE IRA are generally taxed as ordinary income at your current income tax rate. This means the money you receive will be added to your gross income for the year, potentially pushing you into a higher tax bracket. The tax liability can be substantial, as the entire amount withdrawn is subject to federal income tax, and possibly state income tax depending on your residence.

If you are under age 59½ when you take a withdrawal, the distribution is generally subject to an additional 10% early withdrawal penalty. This penalty is imposed by the Internal Revenue Service (IRS) on top of your regular income tax liability. However, certain exceptions exist that may allow you to avoid this 10% penalty, such as withdrawals made due to permanent disability, for unreimbursed medical expenses exceeding a certain percentage of your adjusted gross income, or for qualified first-time home purchases up to $10,000.

An additional 25% penalty applies if funds are withdrawn or rolled over to a non-SIMPLE IRA within the first two years of your participation in the plan. This 25% penalty is imposed in addition to the standard 10% early withdrawal penalty if you are also under age 59½. For instance, a withdrawal made within this two-year window by someone under 59½ could result in a combined 35% penalty on top of ordinary income taxes. Due to these significant tax and penalty implications, taking a direct withdrawal is generally not recommended unless it is a financial necessity.