What Happens to Your Simple IRA When You Terminate Employment?

What Happens to Your Simple IRA When You Terminate Employment?
People concerned about their retirement will want to understand IRA laws.

What Is a Simple IRA

A Simple IRA is a retirement plan that can be set up by an employer. It has a degree of advantages for the employer when it comes to making contributions to individual worker accounts. On the reverse side, for the employees there are many limitations and strings attached with a Simple IRA account versus a more traditional retirement account. However, a Simple IRA is like other investment accounts in that it gets rolled over after job termination--it cannot be taken back by the employer.

The Two-Year Period

There is a two-year period from the start of a Simple IRA where if an employee withdraws any amount, large income tax penalties are imposed on the account. According to the IRS, the two years starts on the date that the employee enrolled in the plan.

Rollover Options

After termination of employment, there are several options to rolling over a Simple IRA. The best one might be to roll it into a regular or Roth IRA account, which will prevent many of the tax penalties that come from withdrawing the money. Another possible option is to find another job, set up a 401k plan at the new job and roll the Simple IRA money into that account. As a last resort, the plan can always be cashed out for a check.

Possible Penalties

There are a couple of possible penalties that can result depending on the actions you take with a Simple IRA. The most common penalties is paying income tax because of withdrawal. If this is done in the first two years, the more common 10 percent penalty becomes 20 percent. In most situations where the account has been around longer than two years and is not getting rolled over, it will be 10 percent. There are also some retirement accounts that a Simple IRA cannot be rolled into without penalty, so always look for professional advice before making a final decision.

Results of Non-action

Generally an individual will have a set amount of time to do take action with his account. Not taking action does not equal losing the account--an employer cannot seize funds from a Simple IRA because legally those finds belong to the worker. However, after a period of inaction, they can cut you a check, forcing you to take the tax penalties on the account.