SEP and SIMPLE IRA Rollovers Explained: What Investors Need to Know
When it comes to retirement planning for small business owners and self-employed individuals, SEP and SIMPLE IRAs are popular tools. However, the process of rolling these accounts over—whether to consolidate retirement assets, switch providers, or pursue more investment options—can be confusing. In this article, we’ll break down what a rollover is, when and how it can be done, and important considerations to keep in mind.
Understanding the Basics
- SEP IRA (Simplified Employee Pension IRA): Designed for business owners and the self-employed, SEP IRAs allow employers to make tax-deductible contributions to retirement accounts for themselves and eligible employees. Contributions are made by the employer only, and the plan is easy to administer.
- SIMPLE IRA (Savings Incentive Match Plan for Employees): SIMPLE IRAs are also aimed at small businesses but include employee contributions. Employers are required to either match employee contributions or make nonelective contributions for all eligible employees. These plans are ideal for businesses with 100 or fewer employees.
What Is a Rollover?
A rollover is the process of moving retirement funds from one account to another without incurring taxes or penalties—if done properly. There are two main types:
- Direct rollover: Funds are transferred directly from one financial institution to another.
- Indirect rollover: Funds are distributed to the account holder, who then has 60 days to deposit them into another retirement account.
When Can You Roll Over a SEP or SIMPLE IRA?
- SEP IRA Rollovers:
- SEP IRAs can be rolled over at any time to another IRA or to a qualified retirement plan (like a 401(k)).
- Rollovers are treated like traditional IRA rollovers, with no penalties or taxes if done correctly.
- SIMPLE IRA Rollovers:
- SIMPLE IRAs have a two-year rule: Funds can only be rolled over into a non-SIMPLE IRA (like a traditional IRA or 401(k)) after the participant has been in the plan for at least two years.
- If you roll over SIMPLE IRA funds to a non-SIMPLE account before the two-year mark, the IRS may impose a 25% penalty in addition to regular taxes.
Why Consider a Rollover?
- More Investment Choices: Some brokerage firms offer a broader range of investment options than others.
- Consolidation: Keeping all retirement savings in one place makes managing your portfolio easier.
- Lower Fees: Rolling into a lower-cost provider can save money over time.
- Better Services or Advice: Investors may want access to financial planning services or more sophisticated tools.
Things to Watch Out For
- Penalties for Early Distribution: If you don’t complete an indirect rollover within 60 days, the IRS may treat it as a withdrawal.
- IRS Reporting: Rollovers must be reported on your tax return, and institutions are required to issue 1099-R and 5498 forms.
- Custodian Rules: Each financial institution may have its own process and paperwork, so be sure to follow their instructions closely.
Final Thoughts
Rolling over a SEP or SIMPLE IRA can be a smart move when done for the right reasons—and done correctly. It’s important to understand the rules, especially the two-year restriction on SIMPLE IRAs, and to consult with a financial advisor or tax professional before making changes to your retirement accounts.