Can a SIMPLE IRA Be Turned Into a 401K?

In some circumstances, you can roll money from a SIMPLE IRA to a 401k.

In some circumstances, you can roll money from a SIMPLE IRA to a 401k.

If you work for a small business, your employer's retirement plan might take the form of a SIMPLE Individual Retirement Arrangement rather than a 401k. If you switch employers you can move your money from your SIMPLE IRA into a 401k. However, certain restrictions apply, and if you don't play your cards right you could end up with a hefty tax bill.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees (SIMPLE) is a cross between a regular IRA and a 401k. As with other types of IRAs, all of the funds in the account belong to you from the day of deposit. Technically, you can withdraw the money at any time, although you have to pay ordinary income tax when you make withdrawals. You also pay a tax penalty of 10 percent to 25 percent depending on your age and the length of time you have held the account. Unlike a regular IRA, SIMPLE IRAs are employer sponsored accounts. You and your employer can both make contributions to the account. These plans are only available through businesses with no more than 100 employees, while no such restriction applies to 401ks.

Rollover

SIMPLE IRAs, like 401ks, grow on a tax deferred basis. You can roll over money between different types of retirement accounts without paying taxes as long as you withdraw and redeposit the money within 60 days. However, SIMPLE IRA rollovers are subject to a two-year seasoning requirement. You cannot withdraw or roll over money from a SIMPLE IRA within two years of first funding the account. If you do so, you must pay a 25 percent tax penalty and accept the distribution as taxable income. If you move your money into another SIMPLE IRA, the tax penalty does not apply but it does affect 401k rollovers.

Roth Accounts

SIMPLE IRAs are funded with pre-tax contributions, while a 401k can contain either pre-tax or after-tax contributions. After-tax 401ks are known as Roth accounts. Withdrawals from a 401k Roth account are not subject to income tax as long as you keep the money in the account until you are 59 1/2. You can't roll SIMPLE IRA money into a Roth 401k because if you did so you would have avoided paying income tax on your original investment.

Termination

Expanding businesses often hire new workers. This can cause some companies with a SIMPLE IRA plan to grow to more than100 employees. If this occurs at your job, your employer must terminate the plan. SIMPLE IRAs operate on a calendar year basis, which means the plan would close at the end of December. Thereafter, your employer could start a 401k plan. You can roll your SIMPLE IRA money into the new plan if you've had the account for at least two years. If you haven't had the account for that long you can roll the money into a traditional IRA.

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