Table of Contents

Page 1

    1. SIMPLE IRA Contributions
    2. When employees want to stop contributions
    3. When and where are contributions made?
    4. Who owns SIMPLE IRA contributions?
    5. What information do I need to give to my employees?
    6. What are the basic distribution/withdrawal rules?
    7. Rollovers
    8. What are the filing and notice requirements?
    9. How can I tell if my plan is operating within the rules?
    10. What do I do if I made a mistake in operating my plan?
    11. How does a SIMPLE IRA plan work?
    12. SIMPLE IRA Pros and Cons
    13. Are SIMPLE IRA Participant Loans permitted?
    14. Are SIMPLE IRA In-Service Withdrawals permitted?
    15. Establishing a SIMPLE IRA Plan
    16. How do I choose a Financial Institution for a SIMPLE IRA?
    17. What steps do I need to take to set up a SIMPLE IRA Plan?
    18. Execute a Written Agreement
    19. Annual Notice to Eligible Employees
    20. Set Up a SIMPLE IRA for Each Eligible Employee
    21. Timing of Setting Up a SIMPLE IRA Plan
    22. Who Can Participate in a SIMPLE IRA Plan?
    23. SIMPLE IRA Employee Contributions
    24. SIMPLE IRA Employer Contributions
    25. Limits on SIMPLE IRA Contributions and Benefits
    26. SIMPLE IRA Investing Plan Assets
    27. When can employees choose their own SIMPLE IRA investments?
    28. SIMPLE IRA Fees
    29. SIMPLE IRA Automatic Enrollment
    30. Types of SIMPLE IRA Automatic Enrollment
    31. Default SIMPLE IRA investments if employee does not make an election
    32. SIMPLE IRA Distributions
    33. Tax on Early SIMPLE IRA Distributions
    34. Early Distributions from SIMPLE IRAs
    35. Additional Tax on Early SIMPLE IRA Distributions
    36. Hardship SIMPLE IRA Distributions
    37. SIMPLE IRA Immediate and Heavy Financial Need
    38. SIMPLE IRA Hardship Distribution is Limited to the Amount Necessary
    39. Account balances eligible for SIMPLE IRA hardship distributions
    40. SIMPLE IRA Tax treatment of hardship distributions
    41. SIMPLE IRA Loans

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Required Minimum Distributions (RMDs) in a SIMPLE IRA

You cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

The minimum amount you must withdraw from your account each year is called your required minimum distribution.

Can I withdrawal more than the minimum distribution from my SIMPLE IRA?

You can withdraw more than the minimum required amount.

Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

How do I calculate the required minimum distribution for my SIMPLE IRA?

The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.

Beginning date for your first required minimum distribution

  • IRAs (including SEP and SIMPLE IRAs)
  • April 1 of the year following the calendar year in which you reach age 70½.
  • 401(k), profit-sharing, 403(b), or other defined contribution plan
    • Generally, April 1 following the later of the calendar year in which you:
      • reach age 70½, or
      • retire.

Terms of the plan govern. The plan’s terms may allow you to wait until the year you actually retire to take your first RMD (unless you are a 5% owner). Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired.

5% owners. If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½.

See the chart comparing IRA and defined contribution plan RMDs.

When I turn 70½, do my SIMPLE IRA minimum distribution requirements change?

Example: You are retired and your 70th birthday was June 30, 2011. You reached age 70½ on December 30, 2011. You must take your first RMD (for 2011) by April 1, 2012.

Example: You are retired and your 70th birthday was July 1, 2011. You reached age 70½ on January 1, 2012. You do not have an RMD for 2011. You must take your first RMD (for 2012) by April 1, 2013.

The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.

Example: John reached age 70½ on August 20, 2011. He must receive his 2011 required minimum distribution by April 1, 2012, based on his 2010 year-end balance. John must receive his 2012 required minimum distribution by December 31, 2012, based on his 2011 year-end balance.

If John receives his initial required minimum distribution for 2011 on April 1, 2012, then both his 2011 and 2012 distributions will be included in income on his 2012 income tax return.

What happens if I do not take required minimum distributions as required from my SIMPLE IRA?

If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

  • To report the excise tax, you may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.
  • See the Form 5329 instructions for additional information about this tax.

What are required minimum distributions after the SIMPLE IRA account owner dies?

For the year of the account owner’s death, use the RMD the account owner would have received. For the year following the owner’s death, the RMD will depend on the identity of the designated beneficiary.

How do I Calculate the required minimum distributions for designated SIMPLE IRA beneficiaries?

Beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table (Table I, Appendix C, Publication 590, Individual Retirement Arrangements (IRAs)). The table shows a life expectancy based on the beneficiary’s age. The account balance is divided by this life expectancy to determine the RMD.

  • Spouses who are the sole designated beneficiary can:
    • treat an IRA as their own, or
    • base RMDs on her own current age,
    • base RMDs on the decedent’s age at death, reducing the distribution period by one each year, or
    • withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date.

If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70½ to begin receiving RMDs

  • Individual beneficiaries other than a spouse can:
    • withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or
    • calculate RMDs using the distribution period from the Single Life Table based on:
      • If the owner died after RMDs began, the longer of the:
        • beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or
        • owner’s remaining life expectancy at death, reduced by one for each subsequent year
      • If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.

See Publication 590, Individual Retirement Arrangements (IRAs), for details on calculating required distributions for beneficiaries.

Chart of required minimum distributions for IRA beneficiaries

What are the rules for Rollovers of SIMPLE IRA Distributions?

Generally, a rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.” See our Rollover Chart for all of the different places rollovers can go.

WHY should I roll over my SIMPLE IRA?

When you roll over a retirement plan distribution, you generally don’t have to pay tax on it until later, when you take it in cash. Also, by rolling over, you are saving for your future and your money continues to grow tax-free.

Consequences of not rolling over (other than qualified Roth distributions) are paying tax on the amount you received and paying, for some, an additional tax on early distributions.

If you received a distribution from your retirement account upon recently leaving employment and are under age 55, you may have to pay an additional 10% tax on early distribution on the amount you receive. There are situations when the law may exempt you from the additional 10% tax on early distributions.

Distributions from a SIMPLE IRA within the first two years of participation will be subject to a 25% additional tax.

WHAT can you roll over into a SIMPLE IRA?

You can roll over distributions of all or any part of your retirement account balance that is not any of the following:

  1. A corrective distribution from a qualified retirement plan of excess contributions or deferrals and any income allocable to the excess, or of excess annual additions and any allocable gains,
  2. A distribution to you that is one of a series of substantially equal payments made at least once a year based on your life expectancy, the joint life expectancy of you and your beneficiary or paid over a period of ten years or more,
  3. A required minimum distribution,
  4. A hardship distribution,
  5. A Loan treated as a distribution,
  6. Dividends on employer securities, or
  7. The cost of life insurance coverage.

Note: You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a §403(b) plan or to a traditional IRA. The transfer must be made either through a direct (trustee-to-trustee) rollover to a qualified retirement plan or a §403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to an IRA. Any taxable amount that is not rolled over must be included as income in the year of the distribution.

You can roll over a distribution from a designated Roth account to another designated Roth account or to a Roth IRA. If the rollover is to Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Earnings from a designated Roth account may be rolled over using any rollover method.

HOW do you roll over into a SIMPLE IRA?

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan.

The plan administrator (other than an IRA) making the distribution must give a written explanation of rollover treatment to you. Notice 2009-68 simplifies the presentation of an employee’s options when receiving an eligible rollover distribution. It contains two sample explanations that satisfy the requirements of the notice employers must provide to employees leaving with retirement assets. These sample explanations also reflect law changes — such as information on a distribution from a designated Roth account under an employer plan — and to explain rules that apply in special situations — such as when a distribution is made to a surviving spouse or other beneficiary. This notice “modifies and supersedes” Notice 2002-3. However, the models in Notice 2002-3 (appropriately modified to reflect statutory changes) will continue to be safe harbor explanations with respect to notices provided through the end of 2009. (So, sponsors can immediately move to the models in the new notice, or can continue to use the old models as appropriately modified on a transition basis through the end of 2009.)

Your employer can transfer your distribution directly to another eligible plan or to an IRA. Under this option, the 20% mandatory income tax withholding does not apply. If, when you receive your retirement plan account, it is between $1,000 and $5,000 and you do not choose to receive the money directly or have it rolled over into another plan or IRA, your plan administrator is required to “cash-out” the account by setting up an IRA in your name and then make a “direct rollover” to that account. If your retirement plan account balance is less than $1,000, your plan administrator may pay it to you without your consent less the mandatory 20% income tax withholding. You can still, of course, roll over the amount received as a cash-out within 60 days of receiving it.

WHEN should you rollover into a SIMPLE IRA?

You have 60 days from the date you receive a retirement plan distribution to roll it over. Remember that any distribution paid to you will already have a mandatory income tax withholding of 20%, even if you intend to roll it over later. If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the 20% income tax withheld. The IRS does have the authority to waive the 60-day rollover requirement in certain situations.

WHERE can you roll your SIMPLE IRA over to?

You can roll your money into many different types of retirement arrangements: another retirement plan, an IRA, 403(b) and others. See our Rollover Chart for all of the different places rollovers can go.

Notice for SIMPLE IRA plans

If an employer adopts a SIMPLE IRA plan, it must notify each employee of the following information before the beginning of the election period.

  1. The employee’s opportunity to make or change a salary reduction choice under a SIMPLE IRA plan.
  2. The employer’s choice to make either matching contributions or nonelective contributions.
  3. A summary description provided by the financial institution.
  4. Written notice that his or her balance can be transferred without cost or penalty if the employer uses a designated financial institution.

Election period. The election period is generally the 60-day period immediately before January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). However, the dates of this period are modified if the employer sets up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan.


“Vesting” in a retirement plan means ownership. This means that each employee will vest, or own, a minimum percentage stated in the plan document of their account in the plan each year. When an employee is 100% vested in his or her account balance, he or she owns 100% of it and the employer cannot forfeit, or take it back, for any reason. Amounts that are not vested may be forfeited by employees when they are paid their account balance or when they don’t work more than 500 hours in a year for five years.

Employee contributions – (for example, employee elective deferrals) are always 100% vested, or owned, by the employee.

Employer contributions – Different plan types have different vesting requirements for employer contributions:

  • SEP and SIMPLE IRA (and other IRA-based) plans require that contributions to the plan are always 100% vested.

Most of the information on this page was taken directly from the IRS website:,,id=139831,00.html

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