I Have Assets in A SIMPLE IRA; May I Roll Them Over Into A 401(k) Plan?

I Have Assets in A SIMPLE IRA; May I Roll Them Over Into A 401(k) Plan?

Find out the guidelines for transferring assets from a SIMPLE IRA into a 401(k) 

The majority of workers will switch careers and employment multiple times during the course of their working lives. When an individual leaves an employer where they participated in an employer-sponsored retirement plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) IRA or a 401(k) plan, they are faced with the challenge of deciding what to do with the assets that they have accumulated within the plan. 

You would most likely be required to pay taxes on any untaxed amounts if you withdrew the assets. However, you generally have three alternative options for dealing with 401(k) assets that are held in a plan that was offered by a previous employer. You have the option of keeping them in the plan or rolling them over into another qualified retirement plan, such as a rollover IRA, a 401(k) with a new employer, or another qualified retirement plan.

However, the requirements for assets held under a SIMPLE IRA are a little bit different. If you want to avoid paying taxes on the money you roll over from your SIMPLE IRA into your 401(k) plan, you must complete the rollover within a specific window of time.

Key Takeaways

A Retirement Contribution Matching Program for Employees (SIMPLE) An individual retirement account, or IRA, is an unusual form of retirement plan offered by employers to companies with fewer than 100 employees.

If you have participated in the plan for at least two years, you will be eligible to roll over your SIMPLE IRA into another qualified plan. In that case, it would be considered a withdrawal rather than a rollover. The date of the rollover will determine how the tax treatment of the rollover will be applied.

A Brief Introduction to SIMPLE IRAs

A simplified employee retirement account, or SIMPLE IRA, is a type of individual retirement account (IRA) that is sponsored by an employer and allows both the company and the employee to make contributions to the individual IRAs that are formed for each employee under the plan. These plans are often accessible to companies of a certain size that have fewer than one hundred employees.

A SIMPLE IRA can be thought of as a hybrid between a standard IRA and a 401(k) plan in terms of its functionality. Your employer is obligated to put money into a simplified employee retirement account (SIMPLE IRA) on your behalf. The contribution must be either a match of up to 3% of your remuneration (with no compensation cap) or a nonelective contribution for all eligible employees. There can be no cap on the compensation. In this case, it could be equal to 2% of your total income, up to maximum annual compensation of $305,000 in 2021 ($290,000 in 2021). 

In addition, if you are an employee, you have the option of contributing to a SIMPLE IRA using pre-tax pay reductions. If you are under the age of 50 in 2021, you will be able to contribute a maximum of $13,500 from your earnings to a SIMPLE IRA. This limit will increase to $14,000 in 2022. If you are at least 50 years old, you are eligible to give an additional $3,000.

Your contributions to the plan will always result in the complete vesting of those contributions. This ensures that you will continue to hold ownership of them at all times.

Both the employer and the employee can take a tax deduction for their contributions to a SIMPLE IRA. Employee contributions can also be excluded from gross income.

Rolling Over Your IRA Can Reduce Your Tax Burden In A Convenient Way

When you pull money out of your SIMPLE IRA plan, you are typically responsible for paying income tax on that money. If you take withdrawals from your retirement account before you become 59 and a half years old, you will be required to pay an additional 10% penalty unless you qualify for one of the exceptions, such as if you have a disability or if you get the withdrawal as an annuity.

 If you transfer the funds from your SIMPLE IRA into a 401(k) when you leave your job, you won’t have to worry about any of these potential financial setbacks. When you time the rollover correctly, it is not regarded as a withdrawal, and so your age is not a factor in determining whether or not you can do so. 

Specifics Regarding Rollovers from Simple IRAs to 401(k) Plans

The assets in your SIMPLE IRA can easily be transferred over to a 401(k) account. But you must make sure the rollover is done according to the rules of your SIMPLE IRA plan and the IRS’s rules for the rollover to be free of taxes and penalties.

 After a period of two years has passed, you will be eligible to make a tax-free rollover from a SIMPLE IRA to a 401(k) plan. It is not the day that you left your company that triggers the beginning of the clock; rather, it is the date that you initially participated in the plan.

 If you do not adhere to the two-year rule, you will be subject to financial penalties in the form of taxes. If you roll over your SIMPLE assets into a 401(k) plan within the two-year term, the amount will be considered a withdrawal, even though it did not occur within that time period. You have to include the withdrawal in your taxable income for the year in question. 

There is a chance that you will also have to pay an extra fee because of your age.

 If you roll over your SIMPLE IRA within the two-year term, you will face a 25% penalty rather than the 10% penalty you would face if you were younger than 59 and a half years old, assuming you do not qualify for an exception to this rule. one’s employment status is not, in and of itself, regarded as an exception. If the amount you withdraw from your health insurance plan during your period of unemployment is less than the amount that you pay for health insurance during that time, you may be eligible for an exception to this rule.

To be eligible for a tax-free rollover into a 401(k), your SIMPLE IRA needs to have been open for at least two years from the date you started participating in the plan (k). 

Transfers from One SIMPLE IRA to Another SIMPLE IRA (Rollovers)

If you are unable to wait the required two years, you may be able to carry out a tax-free rollover by transferring the assets from your SIMPLE IRA into another SIMPLE IRA. During the two-year term or after it has passed, you are able to transfer any amount from one SIMPLE IRA to another SIMPLE IRA without incurring any taxes as part of a tax-free trustee-to-trustee transfer. The Internal Revenue Service will not make you wait two years before allowing you to make this kind of transfer.

 You are only allowed to perform one rollover from one IRA to another within a period of 12 months. As a result, if you have already completed one rollover within this timeframe, you will be required to wait until the following year to conduct a rollover from your SIMPLE IRA to another SIMPLE IRA.

Rollovers from a SIMPLE IRA into a Roth IRA

The two-year rule is also applicable to rollovers to Roth IRAs, but there is an important catch: the rollover won’t be tax-free. When you file your tax return for a given year, you are required to include in your income any component of the plan that represents income to you that has not been taxed.

The Crux of the Matter

Rolling over assets from a SIMPLE IRA into a 401(k) plan is permissible under the law. However, the date the rollover is completed will determine how the transaction will be taxed. If you wish to avoid paying taxes on the rollover into a 401 (k), you must wait two years from the date you first participated in the plan before initiating the transfer. Alternately, you have the option of moving the assets at any time into another SIMPLE IRA.

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