How to Discontinue a Simple IRA
SIMPLE IRAs are salary-reduced retirement plans provided by small business employers. Both employees and employers have the ability to make tax-deferred contributions that can be annually altered. Employees defer a specified dollar amount or percentage of his or her yearly salary (elective deferral), or nothing at all. Employers match employee contributions dollar for dollar or opt for a non-elective deferral, where employers contribute a set percentage to all employee IRAs across the board. Employers can also opt to allocate nothing if it's financially unfeasible.
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Things You'll Need
- Publication 590 Potentially: transfer or distribution form Calculator Statement of first salary-deferred contribution
Instructions
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Retrieve your statement and check the date you made your first salary-deferred contribution. SIMPLE statutory provisions (Publication 560) require you to keep assets in your SIMPLE for two years starting from the first dated contribution.
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Consider doing a direct transfer (which is tax-free) or 60-day rollover to another SIMPLE IRA plan versus an early distribution. Distributions done within the first two years will up your penalty costs from 10 percent to 25 percent.
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Discontinue your elective deferrals if for whatever reason you are unable to continue them. You have the option of changing your SIMPLE elective deferrals 60 days before the new calendar year, but can cancel them altogether at anytime during the year. Consider consulting your tax advisor first, as you may benefit more tax-wise from the tax-deferred contributions more than you realize.
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Download the necessary transfer paperwork if your intention is to rollover your SIMPLE assets to a SIMPLE being held at another IRA custodian, or to another non-SIMPLE IRA (you still need to meet the two-year period to avoid penalty).
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Calculate your tax liability if taking an early distribution during the two-year holding period. Distributions occurring after the holding period will be subject to the Traditional IRA statutory provisions found in Publication 590. Therefore, if you are not 59 ½ and an early withdrawal exception is not applicable, ordinary income tax and a 10 percent penalty will be owed.
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Complete the distribution on line, by mail (download distribution form) or over the phone with a financial representative. Be aware that your employer cannot force you to keep your assets in your SIMPLE IRA for any reason.
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Make sure you select your mandatory withholding election. IRA custodians by law are required to withhold a 10 percent federal tax withholding if you don't personally specify one to the custodian. Furthermore, if you overlook or personally request a federal withholding, some states require state withholding as well. This should be factored into your distribution if you need to have a certain amount of net proceeds.
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