Small businesses sometimes fund pension plans called savings incentive match plan for employees individual retirement arrangements (SIMPLE IRA). Both you and your employer can deposit money into your SIMPLE IRA. The account is tax-qualified, which means your money grows tax-deferred. You can roll money from a SIMPLE IRA to a traditional IRA, but these rollovers do not work in the same way as rollovers from other types of employer sponsored retirement accounts.
Deposits to most types of pensions are subject to vesting schedules. This means that your employers deposits do not belong to you at the time of deposit but the money becomes yours over a number of years during a process known as "vesting." However, SIMPLE IRAs work differently and your employer's contributions are not subject to vesting schedules because all of the money in the account belongs to you at all times. Consequently, you can withdraw money from your SIMPLE IRA at any time even while still employed. You can cash-in your account. you can roll it into another SIMPLE IRA, or into a traditional IRA.
Although you can withdraw money from your SIMPLE IRA at any time, you cannot rollover money to a traditional IRA unless at least two years have passed since your employer opened the account. If you attempt to rollover funds before fulfilling this seasoning requirement, the IRS re-characterizes your rollover as a withdrawal. You have to pay federal and state income tax on the money and you also have to pay a 25 percent tax penalty. However, the seasoning requirement does not apply if you decide to roll the money in another SIMPLE IRA.
An actual SIMPLE IRA rollover involves your account custodian making a check payable to you and you depositing that money into a traditional IRA. You have to put the money into a traditional IRA within 60 days of the withdrawal date, otherwise you have to accept the money as a taxable distribution. If that happens, you have to pay income tax and you also pay a 10 percent tax penalty if you are younger than 59 1/2.
When you make the withdrawal, you can instruct your custodian not to withhold funds for taxes. If you provide no such instructions, then your custodian withholds 10 percent of the withdrawal to cover federal taxes. Your state's laws may also require the custodian to withhold funds to cover state taxes. You get this money back when you file your taxes, but in the interim you have to replenish the rollover funds with other cash.
You can avoid having to deal with tax withholdings and the 60 day rollover window if you move your funds via a trustee-trustee transfer. When you do this, you never have access to the money, so your custodian does not have to report the withdrawal as a taxable event to the IRS. The current custodian sends the proceeds to the new custodian. This process usually only takes a few days, but it does not matter if it ends up taking more than 60 days since one of the custodians has control of the money at all times.
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