Can You Convert a SIMPLE IRA Plan to a 401k Plan?

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Some employers offer retirement plan options to their employees as an added benefit to working for the company. Plan options include Savings Incentive Match PLans for Employee Individual Retirement Accounts, or SIMPLE IRAs, and 401k plans. If you change employers, you may be interested in converting money from your SIMPLE IRA plan to a 401k plan at your new employer.

Two-Year Restriction

  • When you start a SIMPLE IRA account, you cannot convert the funds to another retirement account unless the second account is also a SIMPLE IRA. This two-year period begins the day that the first contribution is made to the employee's SIMPLE IRA. For example, if you make your first SIMPLE IRA contribution on Feb. 19, 2012, you must wait until Feb. 19, 2014 before you can convert to a 401k plan without penalty.

After Two Years

  • After two years have elapsed, the IRS removes the restrictions on which accounts you can move your SIMPLE IRA funds into when you convert them. Therefore, as soon as two years have passed, you can move the money from a SIMPLE IRA plan to a 401k plan without any negative tax effects.

Attempted Conversions Before Two Years

  • If you attempt to move money from a SIMPLE IRA into a 401k plan before the two years have passed, the distribution is not considered eligible to be rolled over and you must report that amount on your income taxes as part of your taxable income. In addition, your 401k plan cannot accept your SIMPLE IRA distribution as a rollover contribution. Therefore, if your SIMPLE IRA contribution plus any other 401k contributions for the year exceed your annual contribution limit for your 401k plan, you must pay an excess contributions penalty.

Benefits

  • Converting your SIMPLE IRA to a 401k plan allows you to consolidate your retirement funds into one retirement account. Additionally, your 401k plan may offer you the opportunity to invest in certain funds or other options that are not offered in your SIMPLE IRA, or offered with lower fees. When you convert your money from a SIMPLE IRA to a 401k plan, you do not incur any additional tax liability because you move the money from one tax-deferred account to another.

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