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. When they move on, 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 then faced with figuring out what to do with the assets that accumulated in the plan.

Assuming you don't want to withdraw the assets, which will likely require you to pay taxes on un-taxed amounts, 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 roll them over—that is, move them into a rollover IRA or a new employer's 401(k) or another qualified retirement plan.

But the rules are slightly different for SIMPLE IRA assets. 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 every 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 traditional IRAs and 401(k) plans. Your employer is required to make contributions to a SIMPLE IRA on your behalf. The contribution must be either a matching contribution of up to 3% of your compensation (with no cap on the compensation) or a nonelective contribution for every eligible employee amounting to 2% of your compensation up to the annual compensation limit of $290,000 in 2021 ($285,000 in 2020).

As an employee, you can also elect to make what are known as salary-reduction contributions to a SIMPLE IRA. Employees can contribute from their salary a maximum of $13,500 to a SIMPLE IRA in 2020 and 2021 if they're under 50 years old (plus an extra $3,000 in catch-up contributions if they're 50 or older). The contributions you make to the plan are always fully vested, meaning that you will always have ownership of them.

Moreover, employers can deduct their contributions, and employees can exclude the contributions from their gross income.

Limiting Taxes With a Simple IRA Rollover

You will normally have to pay income tax on withdrawals you take from your SIMPLE IRA plan. In addition, you will usually pay a 10% penalty if you take withdrawals before you reach age 59.5 unless you qualify for an exception—if you have a disability or receive the withdrawal as an annuity, for example.

However, you can avoid taking 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, either, because the rollover is not considered to be a withdrawal if 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 a tax-free, penalty-free trustee-to-trustee transfer.

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 will have to pay taxes if you don't comply with the two-year rule. Within the two-year period, if you proceed to roll over your SIMPLE assets into a 401(k) plan, the amount will be treated as a withdrawal, and you will have to include the withdrawal in your taxable income for that year. You would, therefore, be taxed on the amount.

You may be on the hook for an increased age-related penalty. The 10% penalty you'd pay if you're younger than 59.5 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; however, 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.

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

If you can't wait for two years from the date of plan participation to carry out the rollover, another way to carry out a tax-free rollover is to move assets from your SIMPLE IRA into another SIMPLE IRA.

You're free to transfer any amount from one SIMPLE IRA to another SIMPLE IRA in a tax-free trustee-to-trustee transfer either during the two-year period or afterward. The IRS does not 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 if you already completed one rollover within this timeframe, you would have to wait until the following year to roll over your SIMPLE IRA to another SIMPLE IRA.

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. However, the tax treatment of the rollover will be dictated by the rollover date. If you want to avoid paying taxes, wait for two years from the date of plan participation before you carry out the rollover to a 401(k). Alternatively, move the assets into another SIMPLE IRA at any time.