Simple IRA: to keep or not to keep?
November 1, 2017 1:43 PM   Subscribe

I have an old Vanguard Simple IRA account with less than $10k in it and I have not contributed to it in a long time. Should I cash it out? Should I roll it over into an active 401(k) account (it's not Vanguard)? Should I start contributing to it again on my own?

What are the tax implications with doing either of the above? I live in North Carolina if that makes a difference. I have a little credit card debt that could possibly get erased if I cash it out. I'm not sure what to do with it. It's just sitting there, hardly growing at all.
posted by anonymous to Work & Money (7 answers total) 2 users marked this as a favorite
$10K is nothing to sneeze at - that's a fair amount of money, and could (invested right) compound into a lot more than that.
What you *should* do depends, in part on your age.
If you are under 59.5 do not cash out - you'll pay a 20% penalty on the cash, in addition to income tax on the whole amount. Depending on your tax bracket, that's a big loss.
You can easily roll it over into an active account (and one that's performing better) - at little/no cost. But probably not into an account through your current employer. Talk to the Vanguard folks about how to do this.
Back when I realized I was never going to be at the same job for 20 years (or even ten!), I created a Fidelity "rollover" IRA - I've rolled every 401K I've had (almost six at last count) into that account. This means that old money does linger, and get eaten by fees (I knew one guy who was too lazy to move his account, when he checked 10 years later, there was nothing left of his $22K, he was mad, but had only himself to blame).
If you're not contributing to a 401K or IRA, then yes, contribute more to wherever you put this money.
Don't leave it somewhere with crappy performance - do your research and find a spot where it can grow for you.
posted by dbmcd at 1:53 PM on November 1, 2017 [4 favorites]

An IRA is simply an account type - the fund it is in is separate. If you are unhappy with that particular fund's performance, I'd recommend moving it to VTSMX (also at Vanguard- Vanguard Total Stock Market). If you have many (401k) type accounts, and are trying to simplify the ownership structure then moving it is a good idea.

Any way you you change funds or move it (the account person you have to speak to will understand the difference between 'move' and 'cash out') there should be no tax impacts.

Agree that you should not cash out unless you are older than 59.5.
posted by The_Vegetables at 2:01 PM on November 1, 2017 [1 favorite]

I don't know the specific rules about the Simple IRAs (I think it's a specific TYPE of account, right?), but Vanguard's customer service is great and their funds are good and low-cost. Ask them how to roll it into a regular IRA you can purchase Vanguard funds with. If you don't know what you're doing, their Target Retirement accounts are probably a good place for you.
posted by phunniemee at 2:03 PM on November 1, 2017

If you do not have a separate personal IRA, then yes you should open one and contribute to it. You can contribute $5500 per year if you are single, double if you are married. A SIMPLE IRA is like a traditional IRA -meaning your contributions will give you a tax refund when you do your taxes yearly, and when you take funds out, you will be taxed.
posted by The_Vegetables at 2:08 PM on November 1, 2017

Amending what The_Vegetables wrote above to state that current IRA contribution limits are $5500/year no matter if you're single or married. IRS cite.
posted by minervous at 5:12 PM on November 1, 2017 [1 favorite]

SIMPLE IRAs work a little differently than other IRAs (they're more of a hybrid of an IRA and a 401k) so it may be worth it to pay for an hour of a fee-only planner's time to help you sort out your options and what's best for you. But here are the basics:

1) Yes, if you cash out the assets you will be subject to taxes, and a penalty assuming you're under 59 1/2
2) You mention that it's 'old' so I'm assuming it's at least two years old? Per IRS rules you can't move assets out of a SIMPLE for two years starting with the date of the first contribution
3) Your post indicates that you are no longer with the company in question. SIMPLE IRAs, like 401ks, are tied to your earnings from a particular employer. So once you no longer work for that employer, you may not contribute to that plan anymore.
4) Assuming that it is indeed more than two years old and you have indeed left that company, AND your new company's 401k accepts roll-in assets (most do these days), then you can initiate a rollover of the SIMPLE assets to the 401k to keep everything 'under one roof', if you like. Or you can open a new traditional IRA and transfer the SIMPLE IRA assets there. Which one is a better fit can depend on a few factors that are personal to you, hence the recommendation to get a pro to look it over and give you some guidance.

Feel free to PM me if needed
posted by shrieking violet at 10:16 AM on November 2, 2017 [1 favorite]

(shrieking violet's answer is perfect.)
posted by small_ruminant at 4:54 PM on November 2, 2017

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