In this article, we will explore the rules for transferring assets from a SIMPLE IRA to a 401(k) plan.
Overview of SIMPLE IRA Accounts
A SIMPLE IRA is a retirement account offered by an employer to employees, allowing them to contribute to individual accounts for each employee under the plan. These plans are typically available for small businesses with 100 or fewer employees.
A SIMPLE IRA operates similarly to a traditional IRA and a 401(k) plan. The employer is required to contribute to a SIMPLE IRA account on your behalf. The contribution must match up to 3% of your salary (with no salary cap), or it can be a non-elective contribution for each eligible employee. In this case, the contribution can be up to 2% of your salary up to the annual salary limit of $305,000 in 2021 ($290,000 in 2021).
As an employee, you can also choose to contribute to your SIMPLE IRA from your salary. You can contribute a maximum of $13,500 from your salary in 2021 if you are under 50 years old, and this amount increases to $14,000 in 2022. You can make an additional contribution of $3,000 if you are age 50 or older.
Note: Contributions made to the plan are fully owned by you. This means you will always be the owner of them.
Tax Restrictions Using SIMPLE IRA Account Transfers
You typically pay income tax on withdrawals made from your SIMPLE IRA account. You will have to pay an additional 10% penalty if you withdraw before reaching age 59 and a half, unless you qualify for an exception, such as being disabled or receiving the withdrawal as a salary.
You can avoid any of these financial penalties if you transfer the assets from your SIMPLE IRA account to a 401(k) plan when you leave your current employer. Your age is also not a factor in this case, as the transfer is not considered a withdrawal when timed correctly.
Rules for Transferring SIMPLE IRA Accounts to 401(k) Plans
Transferring assets from a SIMPLE IRA to a 401(k) plan is straightforward. However, you must complete the transfer process according to the rules of your SIMPLE IRA plan and IRS regulations to ensure that the transfer meets tax and penalty requirements.
You can only make a tax-free transfer from a SIMPLE IRA to a 401(k) plan after a two-year period has passed. The countdown starts from the date of your first contribution to the plan, not from the date you leave your current employer.
You will have to pay taxes if you don’t comply with this two-year rule. The amount will be treated as a withdrawal if it occurs within the two-year period and you transfer SIMPLE IRA assets to a 401(k) plan. You will need to include the withdrawal in your taxable income for that year.
You may also be subject to an age-related penalty. The penalty you will pay increases if you are younger than 59 and a half and transfer a SIMPLE IRA to a 401(k) plan during the two-year period to 25%, unless you qualify for an exception. Changing jobs alone is not considered an exception. You may qualify for an exception if the amount you withdraw is less than the amount you pay for health insurance during the unemployment period.
Note: Your SIMPLE IRA must have been established for at least two years from the date of participation in the plan to qualify for the tax-free transfer to a 401(k) plan.
Transferring a SIMPLE IRA to Another SIMPLE IRA
Another way to make a tax-free transfer is to move the assets from your SIMPLE IRA to another SIMPLE IRA if you cannot wait for two years. You can transfer any amount from a SIMPLE IRA to another SIMPLE IRA in a tax-free transfer from custodian to custodian during or after the two-year period. The IRS does not require you to wait two years to make this type of transfer.
Note:
You can only make one transfer from an IRA to an IRA within a 12-month period, so you must wait until the following year to transfer a SIMPLE IRA account to another SIMPLE IRA account if you have already completed one transfer during this timeframe.
Transferring a SIMPLE IRA to a Roth IRA
The two-year rule applies to transfers to Roth IRA accounts as well, but with important details: the transfer will not be tax-free. Any portion of the plan that represents non-deductible income to you must be included in your income when filing your tax return for that year.
Conclusion
You can legally transfer SIMPLE IRA account assets to a 401(k) plan, but the tax treatment for the transfer will determine the transfer date. Wait two years from the date of participation in the plan before making the transfer to a 401(k) plan if you wish to avoid paying taxes. Alternatively, you can transfer assets to another SIMPLE IRA account at any time.
Source: https://www.thebalancemoney.com/rolling-simple-ira-assets-into-new-401k-plan-2894494
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