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Reviewed by Charlene RhinehartFact checked by Suzanne KvilhaugReviewed by Charlene RhinehartFact checked by Suzanne Kvilhaug
The rules for SIMPLE IRAs state that employees who participate in this type of tax-deferred retirement account may not transfer funds to another retirement plan for two years after opening a SIMPLE account.
What does this mean, though, if you leave the company within two years, but your new employer does not offer a SIMPLE IRA? Here’s a look at how SIMPLE IRAs work and what you can do if you find yourself in this situation.
Key Takeaways
- Employees must wait two years from the time they open a SIMPLE IRA account before transferring those funds into another retirement plan.
- If you withdraw money from a SIMPLE IRA during the two-year waiting period, you may be subject to a 25% early-distribution penalty.
- However, transfers or rollovers between two SIMPLE IRAs are exempt from the two-year rule.
- When the two years are up, you can move the assets from your SIMPLE IRA into an eligible retirement account via a rollover, a transfer, or a Roth conversion.
Rules Governing SIMPLE IRAs
A SIMPLE IRA is a tax-deferred retirement plan for businesses that have 100 or fewer employees. An employer sets up the plan with a financial institution, which then administers it. The paperwork is minimal—just an initial plan document and annual disclosures to employees. Startup and maintenance costs are low, and employers get a tax deduction for contributions they make to employees’ accounts.
To participate in a SIMPLE IRA, employees typically must have earned at least $5,000 in compensation in any two previous calendar years and be expected to earn at least $5,000 in the current year. Employers can choose less restrictive participation requirements if they wish. An employer may also choose to exclude from participation employees who receive benefits through a union.
To open an account, the employee must fill out a SIMPLE IRA adoption agreement. Once the plan is established, employers are generally required to match each employee’s contribution up to 3% of their pay. Or, instead of matching contributions, the employer can contribute 2% of pay for each employee.
If You Leave During the Two-Year Waiting Period
During the first two years of opening a SIMPLE IRA account, you may not transfer those assets into another retirement plan. This two-year period begins on the first day that your employer deposits a contribution to the SIMPLE account. Any distributions that you do take from a SIMPLE IRA during this two-year period are subject to an early-distribution penalty of 25% if you are younger than age 59½ at the time of the withdrawal.
There’s one exception. The two-year waiting period does not apply to transfers or rollovers between two SIMPLE IRAs. So if you are no longer with the company that sponsored the SIMPLE IRA, you can either leave the assets where they are until the two-year waiting period is over, or you may roll over the assets to a SIMPLE at another financial institution.
Important
If you have a SIMPLE IRA, your employer must allow you to hold your assets at another financial institution—which you may choose, if you wish.
After the Two-Year Period
When two years have elapsed, you may move your SIMPLE IRA to another eligible retirement plan by means of a transfer, rollover (including a direct rollover), or Roth conversion, whether or not you’ve remained with the company that sponsored the SIMPLE.
To accomplish the transfer, you would need to submit a SIMPLE IRA adoption agreement along with a copy of the Form 5304-SIMPLE or Form 5305-SIMPLE that the employer filled out to establish the SIMPLE IRA. The transfer can happen once the new account has been established.
What Is a SIMPLE IRA?
A Savings Incentive Match Plan for Employees (SIMPLE) plan is a type of Individual Retirement Account (IRA). It is a tax-advantaged account designed to help investors save for retirement. Companies with 100 or fewer employees are eligible to set up a SIMPLE IRA for their employees. The paperwork to do so is less intensive than other options.
Employers may choose from one of two contribution options: a 2% non-elective contribution, or an up to 3% matching contribution.
What Are the Disadvantages of a SIMPLE IRA?
The main disadvantage for employees is that the contribution limits are lower than with other workplace plans, such as a 401(k). With a SIMPLE IRA, the maximum you can contribute as an employee is $16,000 in 2024 ($15,500 in 2023).
The main disadvantage for employers is the limited contribution options: either a 2% nonelective contribution or an up to 3% matching contribution.
What’s the Difference Between a 401(k) and a SIMPLE IRA?
A 401(k) can be offered by essentially any company that is willing to set up the plan. A SIMPLE IRA, on the other hand, is limited to companies with 100 or fewer employees. And the contribution limits for a 401(k) are higher: for 2024, you can contribute up to $23,000 as an employee to a 401(k). For a SIMPLE IRA, it’s $16,000.
The Bottom Line
If you part ways with your employer and you’re wondering what to do with your SIMPLE IRA, you have a few options. You can leave it where it is, at its current financial institution. You can roll it over to another SIMPLE IRA before two years have elapsed with no penalty. Or you can wait two years after the account was opened, and then move the funds to another account via a rollover or Roth conversion.
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