Can I Roll Over SIMPLE IRA Assets Into a 401(k) Plan?

Learn the rules for moving SIMPLE IRA assets into a 401(k)

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Most people change jobs and employers several times over the course of their careers. Those who participated in an employer-sponsored retirement plan, such as a Savings Incentive Match PLan for Employees (SIMPLE) IRA or a 401(k) plan, are faced with figuring out what to do with the assets that accumulated in the plan when they move on.

Withdrawing the assets would most likely require you to pay taxes on untaxed amounts, but you generally have three other options for dealing with 401(k) assets in a former employer's plan. You can leave them in the plan or you can roll them over, moving them into a rollover IRA or a new employer's 401(k) or another qualified retirement plan.

The rules are slightly different for SIMPLE IRA assets, however. You can legally roll over your SIMPLE IRA assets into a 401(k) plan, but the rollover is time sensitive if your goal is to avoid taxes.

Key Takeaways

  • A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a special type of employer-sponsored retirement plan for small businesses.
  • You can roll over a SIMPLE IRA into another qualified plan if you participated for at least two years. Otherwise, it's a withdrawal, not a rollover.
  • The tax treatment of the rollover will be dictated by the rollover date

Overview of SIMPLE IRAs

A SIMPLE IRA is an employer-sponsored retirement plan that lets employers and employees contribute to individual IRAs established for each employee under the plan. These plans are generally available to small businesses with 100 or fewer employees.

A SIMPLE IRA works like a cross between a traditional IRA and a 401(k) plan. Your employer is required to make contributions to a SIMPLE IRA on your behalf. The contribution must be a match of up to 3% of your compensation (with no cap on the compensation), or it must be a nonelective contribution for every eligible employee. In this case, it can amount to 2% of your compensation up to the annual compensation limit of $305,000 in 2021 ($290,000 in 2021).

As an employee, you can also elect to make salary-reduction contributions to a SIMPLE IRA. You can contribute a maximum of $13,500 from their salary to a SIMPLE IRA in 2021 if you're under age 50, increasing to $14,000 in 2022. You can contribute an extra $3,000 if you're 50 or older.

The contributions you make to the plan are always fully vested. This means that you will always have ownership of them.

Employers can deduct their contributions to a SIMPLE IRA, and employees can exclude their contributions from their gross income.

Limiting Taxes With a Simple IRA Rollover

You will normally pay income tax on withdrawals you take from your SIMPLE IRA plan. You'll have to pay an additional 10% penalty if you take withdrawals before you reach age 59½ unless you qualify for an exception, such as if you have a disability or you receive the withdrawal as an annuity.

You can avoid either of these financial losses if you roll your SIMPLE IRA assets into a 401(k) when you leave your employer. Your age isn't a factor in this case, either, because the rollover isn't considered to be a withdrawal when you time it properly.

Rules for SIMPLE IRA Rollovers to 401(k) Plans

Transferring your SIMPLE IRA assets to a 401(k) is straightforward. But you must complete the rollover within the terms of your SIMPLE IRA plan and the IRS rules to ensure that the rollover qualifies as tax- and penalty-free.

You can only make a tax-free rollover from a SIMPLE IRA to a 401(k) following a two-year period. The clock starts running from the date you first participated in the plan, not the date you left your employer.

You'll have to pay taxes if you don't comply with this two-year rule. The amount will be treated as a withdrawal if it occurs within the two-year period and you roll over your SIMPLE assets into a 401(k) plan. You'll have to include the withdrawal in your taxable income for that year.

You may be on the hook for an increased age-related penalty as well. The 10% penalty you'd pay if you're younger than 59½ increases to 25% if you roll over your SIMPLE IRA within the two-year period unless you qualify for an exception. Changing jobs in itself is not considered an exception. You may qualify for an exception if the amount you withdraw is less than the amount you pay for health insurance while you're unemployed, however.

Your SIMPLE IRA must be in place for at least two years from the date of plan participation to qualify for a tax-free rollover to a 401(k).

SIMPLE IRA Rollovers to Another SIMPLE IRA

Another way to carry out a tax-free rollover is to move assets from your SIMPLE IRA into another SIMPLE IRA if you can't wait two years. You're free to transfer any amount from one SIMPLE IRA to another SIMPLE IRA in a tax-free trustee-to-trustee transfer during either the two-year period or after. The IRS doesn't make you wait two years to make this kind of transfer.

You can only make one IRA-to-IRA rollover per 12-month period, so you would have to wait until the following year to roll over your SIMPLE IRA to another SIMPLE IRA if you've already completed one rollover within this timeframe.

SIMPLE IRA Rollovers to a Roth IRA

The two-year rule applies to rollovers to Roth IRAs as well, but with one significant wrinkle: The rollover won't be tax-free. Any portion of the plan that represents untaxed income to you must be included in your income when you file that year's tax return.

The Bottom Line

You can legally roll over SIMPLE IRA assets into a 401(k) plan, but the tax treatment of the rollover will be dictated by the rollover date. Wait for two years from the date of plan participation before you carry out the rollover to a 401(k) if you want to avoid paying taxes. Or you can move the assets into another SIMPLE IRA at any time.

Article Sources

  1. Internal Revenue Service. "Retirement Topics - Termination of Employment."

  2. Internal Revenue Service. "SIMPLE IRA Withdrawal and Transfer Rules."

  3. Internal Revenue Service. "SIMPLE IRA Plan."

  4. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), Etc.," Page 1.

  5. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), Etc." Page 2.

  6. Internal Revenue Service. "SIMPLE IRA Plan FAQs - Contributions."