If you work for a small employer (one with less than 100 employees), it might offer a savings incentive match plan for employees' individual retirement accounts (IRAs) instead of a regular 401(k) plan. Called the Savings Incentive Match Plan for Employees, or SIMPLE-IRA, this type of plan offers tax-sheltered savings. Whether you're unhappy with SIMPLE-IRA investments or just want to consolidate your retirement funds, you may be able to roll it into your traditional IRA.
Two-Year Waiting Period
You can only roll money from your SIMPLE-IRA to a traditional IRA after two years have passed since you started the SIMPLE-IRA. For example, say you made your first contribution to the SIMPLE-IRA on Jan. 1, 2013. You cannot roll your SIMPLE-IRA to a traditional IRA before Jan. 1, 2015. Any distributions within the first two years are not eligible to be rolled over into another account, unless it's another SIMPLE-IRA.
When you're eligible, you can use either a rollover or a transfer to move the money from your SIMPLE-IRA to a traditional IRA. With a rollover, you take a distribution from the SIMPLE-IRA and then, within 60 days, you must deposit the money in your traditional IRA. With a transfer, the trustee of your SIMPLE-IRA will move the money straight to your traditional IRA without you having to worry about handling the money and potentially missing a deadline.
As long as you've waited two years, you won't owe any taxes because both accounts offer tax-deferred savings. However, if you used a rollover to move the money, you need to report it on your taxes. To do so, you must use Form 1040 or 1040A for your return, not Form 1040EZ. On Form 1040, assuming you completed the rollover, write the amount of the rollover on line 15a, $0 on line 15b, and "rollover" next to line 15b. If you use Form 1040A, the rollover amount goes on line 11a, $0 goes on line 11b and "rollover" goes next to line 11b.
If you take a distribution from your SIMPLE-IRA before two years has passed, you can't roll it over. Instead, unless you're 59 1/2 years old, you owe a 25-percent early withdrawal penalty. Plus, if you try to put it in your traditional IRA, it counts as a regular contribution. If your rollover puts you over the annual contribution limit, you owe a 6-percent penalty on the excess each year until you correct it.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."