Can SIMPLE IRAs receive rollovers?

Do you have a new job that offers a SIMPLE IRA as a retirement savings option? Did you used to have a 401(k)? If you are considering rolling over your 401(k) into your new plan, it’s important to understand all the rules before deciding.

If you haven’t had a SIMPLE IRA before, you might be wondering what it is. SIMPLE stands for “Savings Incentive Match Plan for Employees,” and an IRA stands for Individual Retirement Account.

A SIMPLE IRA is a type of employer-sponsored retirement plan for small businesses with fewer than 100 employees. Like other employer-sponsored plans, employers can match employee SIMPLE IRA contributions to help boost retirement savings.

In this article, we’ll cover:

• How to roll over a 401(k) to a SIMPLE IRA
• The advantages of the SIMPLE IRA retirement account
• What you should know before making your rollover decision

Can a Simple IRA Receive Rollovers from a 401k?

Before December 2015, a SIMPLE IRA plan could only receive a rollover from another SIMPLE IRA. Since then, the laws have changed to allow SIMPLE IRAs to receive roll-ins from employer-sponsored retirement plans, like traditional 401(k)s.

This IRS rollover chart shows that you can roll other SIMPLE IRAs, SEP IRAs, traditional IRAs, and other qualified retirement plans into your SIMPLE IRA. But you can’t roll over Roth IRAs or Roth 401(k)s, as they fail the eligibility test for SIMPLE IRA rollovers.

To complete your 401(k) to SIMPLE IRA rollover, you’ll need to follow the below rules:

• The two-year rule: You can roll over your qualified accounts as long as you’ve been participating in your SIMPLE IRA for two years.
• Additional tax implications: If you complete a direct rollover, you won’t have any tax penalties when transferring your 401(k) to your SIMPLE IRA.
  • If you complete an indirect rollover, on the other hand, your 401(k) account custodian must withhold income tax on your withdrawal. Then, you’ll need to re-deposit the entire pre-tax 401(k) balance to your SIMPLE IRA within 60 days. Failure to do so can lead to taxes and penalties.
  • If you do meet the 60-day rule, you’ll get the previous tax withholding (20% of your pre-tax 401(k) balance) back when you file your tax return.

What are some benefits of rolling over your 401(k) to a SIMPLE IRA?

Rolling over your previous retirement accounts into a new SIMPLE IRA can help you organize your finances and keep all of your retirement investments in one place.

For small business owners, it may be preferable to offer a SIMPLE IRA because it can be more affordable than other employer-sponsored plans.

3 Steps to Roll Over a 401(k) to a Simple IRA

After you’ve investigated the benefits and potential drawbacks of rolling over your 401(k) to a SIMPLE IRA, you may be wondering how to get started.

Let’s explore the steps you can take to initiate your rollover.

1. Steps for initiating the rollover process

• The IRS rollover chart shows that you are permitted to roll a 401(k) into a SIMPLE IRA. The first step is contacting your 401(k) plan administrator to begin a direct rollover. If you have the contact info for your 401(k) plan administrator, you can call or email them.
  • Otherwise, you can contact your former employer to get their contact info. You can also use Capitalize to help you track down your previous retirement accounts and have the rollover process managed for you.
• If you have an employer who offers a SIMPLE IRA account through a designated financial institution, you’ll choose that SIMPLE IRA for your rollover. You should be able to find your SIMPLE IRA account number on a recent statement; if you haven’t yet opened a SIMPLE IRA, it’s best to contact your current plan administrator to formally open one.
• You’ll then need to fill out paperwork to initiate your SIMPLE IRA rollover. This will include a request to roll over your 401(k) funds directly to your SIMPLE IRA, or, alternatively, a distribution request to initiate a withdrawal if you choose an indirect rollover.
  • Remember to speak to a qualified tax planner or financial advisor before deciding if an indirect rollover is right for you since there is generally more risk than if you were to opt for a direct rollover.

2. Timeline for completion of the rollover process

If you opt for a direct rollover, it’s up to your 401(k) plan administrator to move the funds into your new SIMPLE IRA. The timeline to transfer can vary from provider to provider, so follow up with the 401(k) administrator and the SIMPLE IRA plan administrator to ensure the process is moving smoothly.

• Keep in mind the two-year rule: You won’t be able to roll over your 401(k) funds into the SIMPLE IRA until you’ve held the IRA account open for at least two years.

3. Importance of following rules to avoid tax implications

You may be wondering about the possibility of tax penalties associated with IRA rollovers and 401(k) rollovers. As long as you follow the two-year rule, and opt for a direct rollover, the transfer will be tax-free. In reality, this makes sense since you’re just moving pre-tax investments from one tax-deferred account type to another. There is no need to pay taxes.

However, if you roll over your 401(k) funds before you’ve had your SIMPLE IRA for two years, any amounts rolled over may be considered taxable income. Additionally, recall that you can’t roll over designated Roth accounts into a SIMPLE IRA, as they’re after-tax investment vehicles incompatible with SIMPLE IRAs.

The rollover process requires several steps, so it’s sensible to work with a professional if you’re feeling uncertain.

Consider working with a company like Capitalize to seamlessly find your previous 401(k)s and roll over your retirement savings successfully.

Advantages of a SIMPLE IRA

With many types of IRAs available, it makes sense to ask about the specific advantages of a SIMPLE IRA versus a Roth or traditional IRA.

Here are some benefits of the SIMPLE IRA that may help with your decision:

• Higher contribution limits than traditional IRAs: If you’re under age 50, the 2023 contribution limit for a SIMPLE IRA is $15,500, whereas, for a traditional IRA, the contribution limit is $6,500 (an additional $1,000 in catch-up contributions is available to those over 50).
  • It’s important to note, however, that your SIMPLE IRA contributions do not count against the $6,500 limit, and you’re eligible to max out both a SIMPLE IRA and a traditional IRA in the same tax year.
• Employer contribution differences: With a traditional IRA, only you, the account holder, are eligible to make contributions. With a SIMPLE IRA, your employer can either match contributions of up to 3% of your compensation or fixed contributions of 2%. Recall that a SIMPLE IRA is an employer-sponsored retirement plan, while a traditional IRA is not.
• Flexible withdrawal options: Like any other tax-deferred retirement plan, you’re subject to taxes when you withdraw money from your SIMPLE IRA in retirement. If you’re over 59 1/2, you won’t owe any penalties upon withdrawal. If you’re under 59 1/2, you’ll also owe a 10% additional tax on any amounts withdrawn; this additional tax increases to 25% if you’ve had your SIMPLE IRA for less than two years.
  • There are a variety of situations outlined by the IRS that can help you avoid the additional tax rules, but these should be considered one-off exceptions.
  • All tax-deferred retirement plans, like SIMPLE IRAs, pre-tax 401(k)s, and pre-tax traditional IRAs will all come with Required Minimum Distributions (RMDs) in retirement.
• Easy to set up and manage: As an employee, setting up a SIMPLE IRA is easy. Your employer sets up the account for you and provides you with details about the plan. All you have to do is sign an agreement to get started, and your SIMPLE IRA assets will grow tax-advantaged once you invest them.

Factors to Consider Before Rolling Over a 401(k) to a SIMPLE IRA

As we’ve emphasized, it’s crucial to consider all key factors before deciding to roll your 401(k) into your SIMPLE IRA. The differences between the two account types are important, so make sure you understand them before making a call.

Below, we’ll explore a few considerations that may help you make your decision.

Compare Fees and Expenses

Fees can significantly impact your accumulated retirement savings. Typically, 401(k)s are associated with higher fees given the plan administrator’s expenses.

Often, SIMPLE IRAs have lower fees, but they also come with lower contribution limits. Be sure to compare the fees of your 401(k) plan with your SIMPLE IRA before you make your decision.

Understand Your Investment Options

Although your employer may contribute to a 401(k) as they do with your SIMPLE IRA, with a 401(k), your employer may require you to work at the company for a period of time before the employer’s contributions are actually yours. This is known as vesting.

With a SIMPLE IRA, all contributions are immediately vested; even when you leave the job, existing contributions are yours with no vesting requirements.

You also may have more investment options with a SIMPLE IRA, as you might have access to a wider investment menu (think ETFs, stocks, bonds, and more) than you do with your 401(k) plan. With a 401(k), the plan administrator may only offer a limited set of mutual fund options from which you must choose.

Consider Your Retirement Goals

When you choose to roll over your 401(k), it’s a good idea to begin with the end in mind. What are your retirement goals? How does your retirement savings plan prepare you for those goals?

Weigh the benefits of a SIMPLE IRA given its early withdrawal penalties, two-year period rule, and other regulations that might create issues for you down the line. At the end of the day, both a SIMPLE IRA and 401(k) are employer-sponsored plans with tax advantages, so contributing to either is likely to be a smart financial move.

Need Help Managing a 401(k) to a Simple IRA Rollover?

Rolling over your 401(k) into a SIMPLE IRA (a “Savings Incentive Match Plan for Employees”) can help you organize your finances, potentially reduce your fees, and assist in gaining access to a broader range of investments. But this choice is one you should make carefully and with advance planning.

Managing a rollover when you change jobs or prepare to retire can be challenging, and working with a trusted partner like Capitalize can help make the process go smoothly. We help you track down your previous 401(k) or other qualified plan accounts, communicate with your plan administrator, and help you effect a tax and penalty-free rollover.

Learn how we can help with a stress-free rollover today.