How Do I Unenroll From a Simple IRA?

Source: StockMonkeys

Many small businesses that want to provide retirement benefits to employees open a Simple IRA, rather than a traditional 401(k).

Money-Zine.com states that “they are very much like 401k plans for small businesses.” Compared to 401(k)s, Simple IRAs are easier to understand and administer, and appear identical to workers.

If your employer arranged a Simple IRA, but you no longer want your money in that account, you can move it elsewhere.

However, the receiving account into which you transfer funds, as well as the method of transfer, will determine if income taxes and penalties will be charged.

Transfer to Another Simple IRA

Legislation regarding retirement accounts stipulates that you can freely transfer your Simple IRA account into another Simple IRA without issue. This transfer is most commonly seen when changing employers.

If your previous employer’s retirement platform was a Simple IRA, and your new employer also provides access to a Simple IRA, you can easily move your money from one account to the other by completing the appropriate transfer paperwork. Since your money will remain in a retirement account, you will have no concerns regarding taxes on that money or penalties for early withdrawal.

Rollover to Traditional IRA

When you terminate employment from a company that offered a Simple IRA retirement account, you have the option of rolling your money into a traditional IRA.

This process is fairly simple and typically involves completing a few forms to open the traditional IRA and transfer your Simple IRA money into it. You will not be charged any IRS penalties or fees for this rollover because the money will remain earmarked for retirement.

Withdrawing the Money

You are free to withdraw money from your Simple IRA at any time, but risk potentially hefty penalties if you are younger than the required minimum age of 59 and six months set by the IRS.

If you have not yet reached the minimum age, you will be charged a 10 percent penalty on any money withdrawn, plus you will owe ordinary income taxes on that sum. If you are older than the minimum age, your withdrawal will be treated as an acceptable retirement account distribution and you will only owe income taxes on the money withdrawn.

Simple IRA Special Penalties

Unlike other types of retirement accounts, Simple IRAs have a special provision that allows the provider to charge you a 25 percent penalty fee if you rollover or withdraw your money within two years of your first contribution.

According to Investopedia, “During the first two years after the SIMPLE IRA is established, assets held in the SIMPLE IRA must not be transferred or rolled to another retirement plan. This two-year period begins the first day the employer deposits a contribution to the SIMPLE IRA.” This penalty cannot be imposed, however, if you transfer your money into another qualified Simple IRA.

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This article is a Twisted Nonsense Exclusive! (01/09/2010)