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SIMPLE distributions


Guest R. Daestrom
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Guest R. Daestrom

I hope this isn't too easy:)

SIMPLE IRA has been around for 4 + years; No future contributions will be made after 12/31/04 and a new 401k plan will start up 1/1/05. How are distributions to be handled from the SIMPLE? I realize that since SIMPLE is not a qualified plan, the money can simply stay where its at. But should/can the plan provide distribution paperwork that would allow cash or, more importantly, rollover distributions to the new 401(k)? Are there any tax consequences (eg, 10% premature w/d penalty or the 25% 2 year violation) if the money is rolled over into the new 401(k)?

Thanks

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The plan/sponsor doesn't have to do anything (and I wouldn't); each participant has an IRA that they can do with as they wish.

The 25% penalty applies in the first two years, even if rolled over. After two years it is treated as a traditional IRA and can be rolled without tax or penalty.

Ed Snyder

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Guest R. Daestrom

There is something to be said though, for having all of ones "plan" assets in one place and if a new 401(k) starts in 2005, the employer may want to give the participants the option of moving their money into the 401k. I think there is a new financial advisor who, for obvious reasons, would also like to have this existing SIMPLE money brought into the 401k.

I did not realize the 25% penalty/tax was incurred even on rollovers. I understand why that would be for cash distributions, but for rollovers that seems pretty harsh. What if SIMPLE assets were moved to a different investment vehicle, still as SIMPLE? Is that OK?

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You are right- consolidation can sometimes be a good thing- but Bird is right. The plan sponsor can allow the participants to rollover the assets to the 401(k) plan…but the bottomline is that the assets are in an IRA, and the owners of the IRAs can do whatever they please with these assets. The employer , plan sponsor nor the financial advisor cannot dictate when and how distributions , including rollovers occur from SIMPLE IRAs.

SIMPLE IRA assets can be moved to anther SIMPLE IRA another at anytime ( before or after two years).

The 25% penalty would apply if the assets are distributed before the two year period and the individual is under age 59 ½ when the distribution/rollover occurs. The 25% penalty would also apply to rollovers ( of SIMPLE IRA assets within the 2-year period) because the transaction would not be treated as a rollover for IRS purposes, instead, it would be treated as a regular distribution and a regular contribution to the receiving plan…if the receiving plan is an IRA, it would be treated as an IRA contribution subject to the $3,000+ catch-up limit (for 2004). If the receiving plan is a qualified retirement plan (QRP), it would be treated as an ineligible rollover which must be removed from the plan in accordance with the allowable corrections procedures as defined by the plan and applicable regulations.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Guest R. Daestrom

I looked into this a little more and I determined that the 2 year period that we are talking about is determined based on when the employee first started to put money into the SIMPLE. So, for example, if the employee first put money into the SIMPLE in 08/2002, and has been contributing all along since then, she would be eligible to move ALL of her SIMPLE money into the new 401(k) that is to take effect on 1/1/05.

Is that correct?

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I'll play devil's advocate and take the other side of the fence. And I'm speaking in generalities - even if one accepts my general viewpoint, there are always situations where the opposite is true.

From an employee point of view, I would rarely want to roll my personal IRA over to an employer plan. I would want the control of my funds, without having to go through a plan Trustee/Administrator if I want to take a withdrawal, another rollover, etc.

With the various low cost/decent yield investment alternatives available even for relatively small IRA's these days, the direct control without one more intermediary (Trustee/Administrator) involved would outweigh the perceived advantages of having it all in one basket.

As an employer, I would rarely want to allow rollovers into my plan. Just one more potential hassle for every screw-up that has taken place over the life of the rollover funds. Again, I know there are valid exceptions - I'm speaking in general terms.

And as a TPA, it can be a royal PIA. It's fine to say it's the problem of the Trustee/Plan Administrator, but you know where the burden usually falls when it comes to correcting a problem!

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Daestrom- You are right. The two-year period starts on the day the first contribution is deposited to the SIMPLE .

Belgarath, I’m, with you 100 %

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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