SIMPLE IRA versus Traditional

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SIMPLE IRA versus Traditional

Postby Bubbagump » Fri May 10, 2013 12:53 am

My employer offers a SIMPLE IRA plan. Currently I am enrolled. Frankly the "adviser" we have is a creep and I trust him as far as Ic an throw him. That said, this got me thinking... I really want to get my retirement money into indexes, but of course the SIMPLE IRA doesn't offer low cost/passive funds. How would my creepy "advisor" make a living. So I am mulling my options.

A few facts I am dealing with:

* My employer contributes 2% of my salary
* My AGI is >$69k

So I am conflicted. I want the 2%, but I don't want to contribute to expensive funds. I also want to maximize my tax deferment, which I can do in the SIMPLE IRA... but then there is that crappy fund selection issue. I could forgo the employer plan making me eligible to maximize the IRA tax benefits... but this is a much lower number than the SIMPLE IRA and I miss out on the 2%.

So what does a guy do? Compounding is the name of the game and given these circumstances, I am not sure which way to run. Do I take more tax deductions up front and get an employer contribution but get clobbered with fees in managed funds I have to look after all the time? Or do I get less tax benefit in a Trad IRA but more potential compounding from lower fees and put whatever I have that is over the Trad IRA limit into a personal index fund or ETF?

Thank you kindly
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Re: SIMPLE IRA versus Traditional

Postby Frugal Al » Fri May 10, 2013 3:56 am

Bubba, see Barry Barnitz's excellent reply to a similar situation just a few posts down: viewtopic.php?f=1&t=116001
As a new poster, do use the search function and read the Wiki. Oh, and welcome to the forum.
Also see the Wiki under employer retirement plans. There are workarounds to poor Simple IRA choices,but in most cases you want to take advantage of the opportunity to increase your tax deferred space and the employer match.

You can do inservice rollovers to another IRA after 2 years. Verify that it is a Simple-5305 plan as opposed to a Simple-5304 which allows employee choice of financial institution. Sometimes employees have a choice but don't realize it. I've seen preprinted 5305 forms with a financial institutions name on it, when in reality the employee was free to choose. Some companies with numerous plan participants find it burdensome to handle payroll distributions to multiple institutions and therefore limit choice.
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Re: SIMPLE IRA versus Traditional

Postby Barry Barnitz » Fri May 10, 2013 3:58 am

Hi:

Relevant fundamental material from the wiki Fiduciary Transfers - Bogleheads

SIMPLE IRA Transfers

Although SIMPLE IRA's comprise a small part of the employer-provided qualified plan universe, they are unique in being the sole plan that currently permits the individual employee to execute in-service trustee-to-trustee exchanges to a fiduciary of the employee's choosing. The first consideration in the selection of a SIMPLE-IRA fiduciary is to determine the type of SIMPLE IRA an employer has established, either an IRS Form 5304-SIMPLE or an IRS Form 5305-SIMPLE.

IRS Form 5304-SIMPLE: this and similar forms of a SIMPLE IRA permit each employee to choose the financial institution for receiving contributions. The employer is required to send contributions on behalf of the employee directly to the financial institution of the employee's choice. Most participants are unaware of this option, so the employee should check with the employer to see what form was used to create the plan. Obviously, if the employee has this type of SIMPLE-IRA he can choose Vanguard as the SIMPLE IRA fiduciary and have all salary deferral and employer matches invested in Vanguard Funds. Vanguard imposes a $25 account fee per fund (waived if Vanguard assets exceed $100,000) on SIMPLE IRAs. If subject to account fees, clients would be best advised to restrict fund selection in order to reduce costs. Vanguard's SIMPLE IRA imposes a five fund maximum limit.

IRS Form 5305-SIMPLE: this and similar forms of SIMPLE IRA require all contributions to be deposited initially at a designated financial institution of the employer's choosing. An employee must execute trustee-to-trustee transfers in order to invest with a fiduciary of choice. During the first two years of SIMPLE IRA participation, a transfer can only be made to another SIMPLE IRA. After two years (dated from the first contribution into the plan) transfers can be made into a Traditional IRA. Using a Traditional IRA avoids the $25 Vanguard SIMPLE IRA account fees. Trustee-to-trustee transfers to Vanguard are executed by: (1) filling out an IRA Transfer Request; (2) including a recent SIMPLE IRA account statement; and (3) having Vanguard execute the transfer. Trustee-to-Trustee transfers do not affect annual contribution limits to personal IRA accounts.

With Form 5305-SIMPLE IRAs an employee should always seek to reduce transfer costs by selecting the lowest cost fund in the employer's plan for accumulating assets for transfer. In the case of load fund SIMPLE IRA's this usually is restricted to a no-load share class of a money market fund. Since on-going salary deferrals and employer matches will continue to be deposited with the employer's fiduciary, avoiding front end loads and back end surrender charges is essential in reducing transfer costs.
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Re: SIMPLE IRA versus Traditional

Postby Alan S. » Fri May 10, 2013 11:49 am

Note that if you have the 5304 SIMPLE allowing you to choose a different custodian, the 2 year waiting period does NOT apply when you roll funds over to another SIMPLE IRA. It just applies to rollovers to another type of IRA.
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Re: SIMPLE IRA versus Traditional

Postby Bubbagump » Fri May 10, 2013 12:10 pm

I read that before posting and I think I missed the point. The key paragraph is:

With Form 5305-SIMPLE IRAs an employee should always seek to reduce transfer costs by selecting the lowest cost fund in the employer's plan for accumulating assets for transfer. In the case of load fund SIMPLE IRA's this usually is restricted to a no-load share class of a money market fund. Since on-going salary deferrals and employer matches will continue to be deposited with the employer's fiduciary, avoiding front end loads and back end surrender charges is essential in reducing transfer costs.


So it sounds like the scheme here is contribute to the SIMPLE IRA per usual. Put the money in the cheapest vehicle you can and roll over funds to a Trad IRA that you can actually manage once the 2 year period is up (Yes, 5305 here.) So while you might lose a tad, you come out net ahead with the employer contribution and tax advantage. Am I understanding this more or less?
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Re: SIMPLE IRA versus Traditional

Postby Alan S. » Fri May 10, 2013 12:16 pm

Bubbagump wrote:I read that before posting and I think I missed the point. The key paragraph is:

With Form 5305-SIMPLE IRAs an employee should always seek to reduce transfer costs by selecting the lowest cost fund in the employer's plan for accumulating assets for transfer. In the case of load fund SIMPLE IRA's this usually is restricted to a no-load share class of a money market fund. Since on-going salary deferrals and employer matches will continue to be deposited with the employer's fiduciary, avoiding front end loads and back end surrender charges is essential in reducing transfer costs.


So it sounds like the scheme here is contribute to the SIMPLE IRA per usual. Put the money in the cheapest vehicle you can and roll over funds to a Trad IRA that you can actually manage once the 2 year period is up (Yes, 5305 here.) So while you might lose a tad, you come out net ahead with the employer contribution and tax advantage. Am I understanding this more or less?


Yes, once you reach the two year waiting period, transfer the SIMPLE funds out often enough so that they do not build up in the SIMPLE IRA. That will result in your receiving the 2% non elective matching contribution on all your contributions, yet you will only have two years worth of contributions and gains restricted to the SIMPLE IRA. Remember that this is still an IRA, so you should move the funds out by direct transfer so you are not limited by the one rollover rule per 12 month period.
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Re: SIMPLE IRA versus Traditional

Postby Bubbagump » Fri May 10, 2013 12:28 pm

Well, it sounds like right now I have to sit and wait as I am about 14 months into the 2 years. Even though I am losing to fees, get a decent enough managed fund and maybe make 10% in the mean time. Thanks a lot folks.
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Re: SIMPLE IRA versus Traditional

Postby Bubbagump » Mon Apr 28, 2014 10:02 pm

I am not one to forget. I passed my two years and am ready to execute. The investment planner dude the office used to setup the SIMPLE IRA was none too happy when I sent him a message telling him to start putting my money in the cheapest thing they have. He swears he'll change my mind and find active funds that will consistently beat the market. I bit my tongue.
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Re: SIMPLE IRA versus Traditional

Postby bobbun » Mon Apr 28, 2014 11:29 pm

"The cheapest thing they have" would ideally be cash... Typically no charge on that. That's what I have my SIMPLE-IRA funds going into at Edward Jones. Be sure you know about any minimum balances you need to keep in the account. Edward Jones will close my account if I drop below the sum of their annual custodial fee and their fee to walk away with your money. Combined these mean I have to keep around $150 in my account minimum.
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Re: SIMPLE IRA versus Traditional

Postby pennstater2005 » Tue Apr 29, 2014 7:25 am

My wife has a Simple and I transfer the funds twice a year. I also keep the money in a money market account to avoid the load their plan adviser has. I transfer it right into her Tira. I get low fees from the money market and avoid the sales commission er I mean front load. Do most plans have a cash option as above poster has? That would be better than the MM my wife is in now.
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Re: SIMPLE IRA versus Traditional

Postby mah001 » Tue Apr 29, 2014 8:24 pm

It's kind of buried above, but even with the 5305-simple you can transfer the funds to another simple ira of your choice anytime, even during the first 2 years. And you don't need a different employer plan to go to, just a SIMPLE Ira type account. See Notice 98-4, q and a J-1....transfer must be permitted without cost.
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