How Much Can You Contribute to a Roth IRA From a Simple IRA?
A SIMPLE IRA is a special type of IRA held with an employer. This type of IRA has much higher contribution limits ($11,500 as of 2010) than a Roth IRA. If you start out contributing to your SIMPLE IRA and you decide that you want to move the money to a Roth IRA, you must know the process for this and how it impacts your retirement planning.
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Process
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The process for contributing to a Roth IRA from a SIMPLE IRA is a rollover or transfer. For a transfer, contact your Roth IRA custodian (the financial institution that holds your IRA) and request that transfer forms be filled out so that you can transfer your SIMPLE to a Roth IRA. Normally, you'll need to contact a broker or representative that works for a financial institution that manages IRA accounts. Your Roth custodian takes down all of your information, including your SIMPLE IRA account number and the balance to be transferred. Once this information has been recorded, the company representative sends you the form so that you can sign and return it.
For a rollover, the process is similar in terms of gathering information on your account (balance to be transferred, account number, etc.). However, with a rollover, you take receipt of the money yourself and are responsible for opening the Roth IRA on your own. Your SIMPLE IRA custodian will withhold 20 percent of your account balance for taxes.
Significance
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The significance of moving your SIMPLE IRA to a Roth IRA is that you are moving money that has never been taxed to an IRA which only accepts after-tax contributions. This means that you must pay income tax on your transfer or rollover amount. When contributing money from your SIMPLE to your Roth IRA, you avoid the normal contribution limits as long as you are using a rollover or transfer method.
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Benefit
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The benefit of moving money to a Roth from a SIMPLE IRA is that you avoid future taxation on withdrawals during retirement. Normally, with a SIMPLE IRA, you will be taxed on all withdrawals from the account. This is because all contributions made to the SIMPLE are pretax. With a Roth, this tax is eliminated, resulting in higher net income during retirement as long as all other investment factors remain equal.
Disadvantage
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The disadvantage to moving money from a SIMPLE to a Roth IRA account is that you pay taxes on all of the money during the transfer. If you use a rollover, you must deposit the money into the Roth within 60 days of closing the SIMPLE. If you miss this deadline, the rollover is treated as a distribution and you may be penalized with a 10 percent early withdrawal penalty by the IRS if you are under age 59 1/2.
Considerations
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Before moving money from a SIMPLE IRA to a Roth IRA, make sure you have enough time to recover the losses you suffer from paying tax on your transfer. If you are retiring within five years of the transfer, for example, and your SIMPLE IRA account balance was significant, you might not want to transfer your SIMPLE IRA to a Roth.
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