How to Change a Simple IRA

A Simple IRA is more formally referred to by the IRS as a Savings Incentive Match Plan for Employers. Small businesses generally implement a Simple IRA because of reduced administrative costs associated with the plan. Contributions made by the employer are 100 percent vested immediately in the Simple IRA and employees may elect to contribute as well. You can change a Simple IRA into a Roth IRA for tax-free growth rather than tax-deferred.

Instructions

1. Maintain your Simple IRA for at least two years. The IRS requires this before allowing a Roth conversion. (You may rollover your Simple IRA into another Simple IRA plan prior to the two years if you don't want to convert it.)

2. Open a Roth IRA account designated to receive the Simple IRA rollover and convert it. The account application will ask you where the funds are coming from and if there is a conversion. Make sure to fill everything out correctly, using an recent Simple IRA statement to get account information and balances.

3. Contact the Simple IRA plan administrator and request rollover paperwork. Fill out the paperwork with the new Roth IRA account number and custodian. (You don't need to change custodians if you are happy with the existing custodian; you can establish the new account with the same custodian, thus eliminating a third party and expediting the process.)

4. File your tax return, Form 1040. Record the conversion on Line 15. You will receive a 1099R for the converted amount. Include Form 8606 to record the Roth cost basis.

Tips & Warnings

• Conversions made in 2010 and later can pay the taxes on a Roth conversion over the two years following the conversion.

• You must hold a Roth IRA for at least five years, regardless of age to get tax-free distributions.

References

• Investopedia: Retirement Tax Forms
• IRS: Simple IRA Plan
• Fairmark: Conversion Eligibility