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Expansion of Rollover Options Includes Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans

Issue Title:

Expansion of Rollover Options Includes  Savings Incentive Match Plan for Employees (SIMPLE) IRA Plans

Description:

The Consolidated Appropriations Act of 2016 expanded the rollover rules to allow rollovers to SIMPLE IRA plans.

IRC Section and Treas. Regulation:

IRC 408  – Individual Retirement Accounts

IRC 72(t) – 10 Percent Additional Tax on Early Distributions

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources):

Consolidated Appropriations Act, 2016 – PL 114-113 (at page 848)

Rev. Rul. 78-406 - Trustee-to-Trustee Transfers

Analysis:

The Consolidated Appropriations Act, Section 306, which became law on December 18, 2015, expanded the list of account types from which SIMPLE IRA plans can accept rollovers.

Previously, a SIMPLE IRA plan could only accept rollover contributions from another SIMPLE IRA plan. The new law expands portability of retirement assets by permitting taxpayers to roll over assets from traditional and SEP IRAs, as well as from employer- sponsored retirement plans, such as a 401(k), 403(b), or 457(b) plan, into a SIMPLE IRA plan. However, the following restrictions apply:

  • The provision does not allow SIMPLE IRAs to accept rollovers from Roth IRAs or designated Roth accounts;

  • The change applies only to rollovers made after the two-year period beginning on the date the participant first participated in their employer’s SIMPLE IRA plan;

  • The new law applies to rollovers from other plans to SIMPLE IRAs that are made after December 18, 2015, the date of enactment; and

  • The one-per-year limitation that applies to IRA-to-IRA rollovers applies to rollovers from a traditional, SIMPLE, or SEP IRA into a SIMPLE IRA.

Section 306 did not change the limitations for payments made from a SIMPLE IRA during the two-year period following initial participation. Under both prior and current law, an amount in a SIMPLE IRA can only be transferred tax free to another SIMPLE IRA during the two-year period if it is made in the form of a trustee-to- trustee transfer. If, during this two-year period, an amount is paid from a SIMPLE IRA directly to the trustee of an IRA that is not a SIMPLE IRA, then the payment is neither a tax-free trustee-to- trustee transfer nor a rollover contribution. The payment is treated as distribution from the SIMPLE IRA and must be included in taxable income. The 25 percent additional income tax for distributions from a SIMPLE IRA within the two-year period applies, unless excepted under IRC 72(t).

Issue Indicators or Audit Tips:

Check the SIMPLE IRA for rollovers from other plans, the date of the rollover, and the age of the SIMPLE IRA account.

Rollovers from Roth IRAs are not allowed.

The rollover from another type of plan to a SIMPLE IRA must be made after December 18, 2015, the date of enactment.

Page Last Reviewed or Updated: 15-Apr-2016