Money Matters

Things to consider when rolling over an old IRA

February 2, 2013 

Q. I have a “Tax-Qualified Simple IRA” account which I began in 1999 at a past employer. I was laid off from this employer in 2003, and I have let this account sit dormant all these years.

I am 51 years old now. At present, I am not employed, although I am looking for a full-time position.

I am considering starting a traditional IRA at a discount brokerage by doing a “rollover” with this simple IRA account.

I would like to know your thoughts about whether or not this is a good idea. Also, do you believe I would be subject to any penalties if I do this rollover … would I “(possibly) incur taxable income by surrendering (my) contract” or would I “(possibly) be subject to a 10 percent premature distribution penalty” as cautioned by the financial services company currently holding the Simple IRA?

If there will be no penalties what is the best way to make this happen?

A SIMPLE IRA (Saving Incentive Match Plan for Employees Individual Retirement Account) is a nice and easy plan for small employers to offer their employees. It functions much like a regular IRA in that is funded with pre-tax dollars, grows tax-deferred and in most cases, distributions prior to age 59 1/9 will be subject to a 10 percent early withdrawal penalty in addition to ordinary income tax.

Portability is a big benefit of SIMPLE IRAs; they can be rolled over into almost any type of retirement plan. This includes a Roth IRA (income taxes would be owed), Traditional IRA, another SIMPLE IRA, SEP-IRA, 457 or 403 (b) plans, profit sharing, money purchase, 401(k) and defined benefit plans.

The Internal Revenue Service has a requirement that during the first two years SIMPLE IRAs can only be rolled to another SIMPLE IRA.

Rollovers prior to the two-year period will be treated as a distribution.

This would result in ordinary income tax on the entire amount, and if under 59 ½ an additional 10 percent early withdrawal penalty. Since you began your SIMPLE IRA in 1999, the two-year rule isn’t a concern.

As long as you do a direct trustee to trustee transfer or meet the 60-day window rule, a rollover from the SIMPLE IRA to your new IRA won’t result in any taxes or penalties from the IRS.

If the financial services company is warning you of penalties, either they don’t know anything about rollovers or they are referring to surrender charges associated with the investment vehicle used for your SIMPLE IRA.

Your former employer may have used an annuity product with an extremely long surrender charge schedule. You need to ask the financial company where your SIMPLE IRA is held if there are any surrender charges if you transfer the investments.

If there are not any, you will be able to make a transfer without any penalties. If there are surrender charges, ask for details about when they will disappear. The longest surrender schedule I’ve seen is 14 years so I would hope, if there are any on your investment, they will go to zero this year.

The simplest (no pun intended) way to complete the rollover is to establish an IRA account at the discount brokerage of your choice and then contact your former employer and ask for the paperwork required for a rollover. Once the completed paperwork is returned to your former employer they will either send the money directly to your IRA custodian or send you a check made payable to the IRA custodian FBO (for benefit of) you. If you receive a check you must deposit it into your IRA within 60 days of date of issue.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 97128, Raleigh, NC 27624

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