Advanced Underwriting Consultants

Ask the Experts – November 19

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who received her ex-husband’s SIMPLE IRA plan as part of the divorce settlement agreement. The SIMPLE plan was created within the last two years. Is there a special rule that allows her to roll this SIMPLE IRA into her own IRA? If not, can she roll it over into her own SIMPLE IRA?

Answer: Generally, a SIMPLE IRA may not be transferred or rolled into another retirement plan within two years from the SIMPLE plan’s inception. The two-year waiting period begins when the employer makes its first contribution into the plan. After the two-year period, normal IRA rollover rules apply.

The only exception to the two-year waiting period is that the SIMPLE IRA may be transferred into another SIMPLE IRA. Neither Congress nor the IRS has granted an exception to the two-year waiting period where an individual becomes the owner of her ex-spouse’s SIMPLE plan through a divorce settlement.

If a SIMPLE IRA is transferred to a traditional IRA within the two-year period, and if the account holder is younger than 59 ½, then she will incur not only ordinary income on the entire amount of the SIMPLE IRA, but also will be subject to 25-percent early withdrawal penalty unless an exception applies.

Your client should be able to transfer her ex-spouse’s SIMPLE IRA into her own SIMPLE IRA during the two-year waiting period with no adverse tax consequences. After two years is up, she may transfer it into her own traditional IRA.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.