Should You Roll Over Your Simple IRA Into a Roth IRA?

Before you roll over your SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) into a Roth IRA, it is key to understand the pros and cons of each plan as tailored to your specific situation. Each plan comes with advantages and disadvantages pertaining to taxation, penalties, age requirements, and fund distributions and withdrawals.

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If you currently use a SIMPLE IRA, you cannot roll it over into a Roth unless you’ve had your account for at least two years without incurring a 25 percent fine. If you choose to convert to a Roth, then you would pay income taxes with no tax penalties on the IRA distribution before a full switch the Roth, Self-Directed IRA Services notes.

One of the most significant differences between a SIMPLE and Roth IRA lies in how income taxes are paid. With the SIMPLE plan, taxes are generally paid upon the withdrawal of money from the account in retirement, and a Roth plan generally allows tax-free withdrawals from the account while requiring that contributions made to the fund are taxed. Another key thing to consider is whether or not your tax rate in retirement will be significantly higher or lower than the tax rate you currently hold.

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A SIMPLE IRA requires the account holder to begin making minimum withdrawals after age 70 and a half, whereas Roth IRAs do not require mandatory withdrawals, ROTHIRA.com notes. If funds are withdrawn from a SIMPLE plan prior to age 59 and a half, then account holders are liable for a 10 percent penalty in lieu of any exceptions.

Furthermore, a Roth account has a maximum contribution limit for the account holder that is based upon your modified adjusted gross income level (MAGI), whereas SIMPLE account holders do not have those restrictions.

Both types of IRAs come with their own advantages and disadvantages, and if you’re considering switching to the Roth plan, you will want to take into account how the end goal of each plan corresponds with your eligibility and limitations.

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