Maxed Out Simple IRA Contributions: Can You Still Open a Self-Directed IRA?

Many individuals with simple IRA (SIMPLE) contributions may wonder if they can still open a self-directed IRA. This article will explore the regulations, options, and steps one can take to open and fund a self-directed IRA even if they have already maxed out their simple IRA contributions for the current tax year.

Understanding Terminology and Regulations

When navigating your retirement savings, it's important to clarify some terminology. As a participant in a SIMPLE IRA, you already have a traditional IRA, and whether that IRA is self-directed depends on the terms of the trust or custodian agreement. Therefore, your question revolves around two main points: (1) whether you can open another IRA, and (2) whether you can contribute to that other IRA. Essentially, you may have the freedom to open a self-directed IRA, but the key issue is how to fund it.

Opportunities to Fund a Self-Directed IRA

One can certainly open additional IRAs, and there are ways to fund a self-directed IRA without making out-of-pocket contributions. Here are some options:

Rollover from Existing IRA: If you have money in an existing Roth IRA, Roth 401(k), Roth 403(b), Roth 457(b), or Roth TSP, you can make a tax-free rollover to fund a new self-directed Roth IRA.

Rollover from Non-Roth Account: If your existing non-Roth retirement account allows, you can make a tax-free rollover to fund a new self-directed Traditional IRA.

Taxable Conversion: If you have a non-Roth account, you can make a taxable conversion to fund a new self-directed Roth IRA. This conversion is a taxable transaction but, for individuals under 59?, there is no penalty if done before age 59?.

These three types of rollover can be used at any time, regardless of whether you have maxed out your contributions for the year or have any work income that year.

Special Considerations for SIMPLE IRA Participants

However, there are special considerations for those participating in a SIMPLE IRA. If the potential source of the rollover is a SIMPLE IRA and the destination is not another SIMPLE IRA, you must wait at least two years after your first contribution to a SIMPLE IRA. Otherwise, what would otherwise be a tax-free rollover will become taxable, and you may face a 25% penalty if you are under 59?.

Non-SIMPLE IRA Rollovers

For rollovers from 401(k) or other non-IRA retirement plans, there must be a "qualifying event." Typically, the "separation of service," i.e., no longer working for the employer, is considered a qualifying event. However, if you are still employed and want to make a rollover, many plans allow turning 59? to be a qualifying event. For a 457(b), the only qualifying event is separation of service.

To sum up, while there are limitations due to participation in a SIMPLE IRA, there are still ways to open and fund a self-directed IRA. Whether you choose a rollover from an existing retirement account or a taxable conversion, understanding the terms and making the right choices can help you maximize your retirement savings. Consult with a financial advisor to determine the best course of action for your specific situation.