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Simple IRA vs. SEP IRA

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1. Can you terminate a Simple IRA at any time?

2. Can you open a SEP IRA the same year the Simple IRA is terminated?

3. If a SEP IRA is effective 1/1/05, do all employees who have worked the past 3 years become immediately eligible? Or do they have to wait 3 years from the time the SEP was established?

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I dont know if there is a termination since the accounts are owned by the participants. Notice 98-4, B-3 states that an employer cannot make contributions to a SIMPLE IRA for any calander year if the employer maintains a qualified plan or SEP under which any of its employees receives an allocation of contributions or an increase in accrued benefits. Perhaps the better term is that the SIMPLE is suspended. It appears that the employer can maintain the SIMPLE without making any contributions after another retirement plan has been established.


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Just to add...

If the employer maintains a SEP or any other retirement plan in the year the SIMPLE is maintained, the SIMPLE contributions are technically disqualified and may be subject to correction by removal of excess contributions, which would require the employer to treat the SIMPLE contributions as W-2 wages for the year.

As far as I know, there is no formal termination process for a SIMPLE - If the employer decides to terminate the SIMPLE, he/she should consider notifying the employees in writing.

The employers can either keep their assets in the SIMPLE- even after termination ( since as mbozek indicated, it is the employee’s own IRA) or transfer or rollover the balance to a traditional/SEP IRA , or other eligible retirement plan. The rollover/transfer to another plan ( that is not a SIMPLE IRA) cannot occur until two years has passed since the first contribution was deposited to the employee’s SIMPLE IRA

Regarding question 3, all employees who worked 3 of the 5 preceding years are eligible, providing they meet the other eligibility requirements.

Life and Death Planning for Retirement Benefits by Natalie B. Choate



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