Many employers choose a SIMPLE IRA because it keeps retirement benefits straightforward and cost-effective. That simplicity works well early on. Over time, it can raise new questions, especially when job changes, income grows, or retirement goals shift. At that point, the ability to move money out of a SIMPLE IRA starts to matter.
Rollover rules for a SIMPLE IRA are not as flexible as they may seem at first glance. Certain timelines apply. Some destination accounts are allowed, while others are restricted. A single misstep could trigger ordinary income taxes or early withdrawal penalties.
Read on to learn how SIMPLE IRA rollovers generally work, when transfers are permitted, and which options may be available depending on timing. We’ll walk you through the core rules, common scenarios, and potential risks to keep in mind before moving retirement funds.
What Is a SIMPLE IRA and How Does It Work?
A SIMPLE IRA is an employer-sponsored retirement plan designed for small businesses. It uses pre-tax employee contributions in most cases, which means taxes are generally deferred until withdrawals begin in retirement. Some employers may also allow a Roth SIMPLE IRA option starting in 2025 if the plan is updated to support it. With a Roth option, contributions are made with after-tax dollars, and qualified withdrawals may be tax-free.
Employees decide how much to contribute through payroll deductions. Employers also play a required role. Unlike some other retirement plans, employer contributions to a SIMPLE IRA are mandatory each year.
📝 Note: A SIMPLE IRA follows different rollover and distribution rules than a 401k. Those rules become especially important when thinking about rollovers later.
Employer Contribution Requirements
Once a SIMPLE IRA is in place, employers must choose one contribution method and apply it consistently for the year. These contributions are made in addition to employee contributions.
Employers typically choose between the following options:
✅ 2% non-elective contribution
Employers contribute 2% of each eligible employee’s compensation, even if the employee does not contribute. Compensation is capped at $350,000 for 2025 and $360,000 for 2026.
✅ Up to 3% matching contribution
Employers match employee contributions dollar for dollar, up to 3% of compensation. The same $350,000 compensation limit applies for 2025 ($360,000 for 2026).
✏️ Hypothetical Example:
An employee earning $80,000 who contributes 3% would generally receive a $2,400 employer match under the matching option.
Employee Contribution Limits
Employees control how much they defer from their pay, up to annual limits set by the IRS.
- 2025 limit: $16,500, or $20,000 if age 50 or older
- 2026 limit: $17,000, or $21,000 if age 50 or older
📝 Note: Contribution limits apply to employee contributions only. Employer contributions do not reduce how much an employee can defer.
These core mechanics set the foundation for how SIMPLE IRAs operate and why rollover rules are more restrictive than many expect.
📌 Also read: SIMPLE IRA Contribution Limits
What Are the SIMPLE IRA Rollover Rules?
SIMPLE IRA rollovers follow a narrow set of IRS rules. The timing of your first contribution matters just as much as your age. Before getting into rollover options, it helps to clarify how SIMPLE IRA withdrawals are treated, since rollovers and withdrawals are closely connected under the tax code.
SIMPLE IRA Withdrawal Rules
SIMPLE IRAs are designed for long-term retirement savings. Withdrawals taken too early often trigger additional taxes.
Withdrawal rules include:
- Penalty-free withdrawals generally begin at age 59½
- Withdrawals before age 59½ are typically subject to:
- Ordinary income taxes, and
- A 10% early distribution tax, unless an IRS exception applies
The penalty becomes steeper during the early life of the account.
- If the SIMPLE IRA is less than two years old, the early distribution tax increases to 25%
- The two-year period starts on the date the employer makes the first contribution, not when the employee first enrolls
📝 Note: Age does not override the two-year rule. Even someone over age 59½ must still follow rollover restrictions during this period.
SIMPLE IRA Rollover Rules
Rollovers are allowed, but the destination account depends on how long the SIMPLE IRA has been active.
During the first two years of participation:
❌ Rollovers to non-SIMPLE retirement plans are treated as taxable distributions
❌ A 25% early distribution tax may apply if the account owner is under age 59½
✅ Rollovers to another SIMPLE IRA are permitted and not taxable
After the two-year participation period ends:
✅ Rollovers to other retirement plans are generally allowed without penalties
✅ The 25% early distribution tax no longer applies
❌ Early withdrawals before age 59½ may still trigger the standard 10% tax if no exception applies
📝 Note: The two-year rule applies regardless of employment status. Leaving an employer does not reset or shorten the clock.
What Happens to a SIMPLE IRA After Leaving an Employer?
Job changes often prompt rollover questions. SIMPLE IRA rules still follow the same timing framework.
If the SIMPLE IRA is less than two years old:
- Assets may be rolled into another SIMPLE IRA at any time
- Rollovers to other retirement accounts are taxable and may trigger the 25% early distribution tax
If the SIMPLE IRA is more than two years old, assets may generally be rolled into other accounts (see the list in the next section).
✏️ Hypothetical Example:
An employee leaves a company eighteen months after the first SIMPLE IRA contribution. Rolling the balance into a Traditional IRA during that period would generally be treated as a taxable distribution.
📌 Also read: Direct vs Indirect Rollovers
What Retirement Accounts Can You Roll a SIMPLE IRA Into?
Once the two-year participation rule is satisfied, a SIMPLE IRA becomes much more flexible. At that point, assets can generally be moved into several other retirement accounts without triggering early distribution penalties. Taxes depend on the type of account receiving the rollover.
📝 Note: The two-year clock starts with the employer’s first contribution. Age does not shorten this requirement.
Eligible Rollover Destinations After Two Years
After the SIMPLE IRA has been active for more than two years, rollovers are typically allowed into the following accounts:
✅ Traditional IRA
✅ SEP IRA
✅ 401k or Solo 401k
✅ 403b plan
✅ Governmental 457b plan
✅ Roth IRA through a conversion, which may result in ordinary income taxes
Each option follows different tax rules, so the destination account matters.
How Taxes Apply to SIMPLE IRA Rollovers
Retirement accounts generally fall into two categories: pre-tax and Roth.
A SIMPLE IRA usually operates as a pre-tax account, although some plans may allow Roth SIMPLE contributions starting in 2025. Most rollovers involve pre-tax dollars.
✅ Pre-tax to pre-tax rollovers
Moving funds from a SIMPLE IRA into another pre-tax retirement account, such as a Traditional IRA or 401k, typically does not trigger taxes at the time of the rollover.
✅ Pre-tax to Roth rollovers
Rolling SIMPLE IRA funds into a Roth IRA is treated as a conversion. The rollover amount is generally included in ordinary income for that year and taxed accordingly.
Pre-Tax vs. Roth Accounts Explained
Pre-tax retirement accounts are funded with income that has not yet been taxed. Taxes are deferred until withdrawals begin, usually after age 59½. At that point, distributions are generally taxed as ordinary income.
Roth retirement accounts are funded with after-tax income. Qualified distributions are typically tax-free once both age 59½ and the five-year holding requirement are met.
📝 Note: Converting a SIMPLE IRA to a Roth account may increase taxable income for the year. That impact varies based on income level and other deductions.
📌 Switching from a SIMPLE IRA? Move your balance into Carry Solo 401k or IRA. Learn more here.
How to Do a SIMPLE IRA Rollover
A SIMPLE IRA rollover involves more than choosing a new account. The timing of the rollover and the destination account both affect whether taxes or penalties apply. Starting with a few checks can help reduce the risk of an unexpected taxable event.
Step-by-Step Rollover Process
1. Confirm the two-year participation rule.
Before initiating a rollover, confirm when the employer made the first contribution to the SIMPLE IRA. Rolling into a non-SIMPLE retirement account before the two-year mark may trigger ordinary income taxes and a 25% early distribution tax if under age 59½. SIMPLE-to-SIMPLE rollovers are generally allowed at any time.
2. Verify eligibility with the current custodian.
Plan administrators can confirm whether the account is eligible for rollover and whether any restrictions apply. This step helps avoid processing errors that could cause tax issues.
3. Choose the destination account.
Decide whether the rollover will go to a pre-tax retirement account or a Roth account. Pre-tax destinations typically avoid current taxes. Roth rollovers are treated as taxable conversions.
4. Request a direct rollover.
Ask the new custodian to initiate a direct rollover, where funds move between custodians without passing through the account owner’s hands. This method reduces the risk of withholding or accidental distributions.
5. Plan for taxes if converting to Roth.
If rolling a SIMPLE IRA into a Roth IRA, ordinary income taxes generally apply to the rollover amount. No taxes are typically due when rolling into another pre-tax retirement account.
📝 Note: Indirect rollovers increase the risk of penalties and withholding. Direct rollovers are generally the preferred approach.
Final Thoughts
SIMPLE IRA rollovers follow clear rules, but the details matter. The two-year participation requirement often determines which rollover options are available. Age, account type, and the destination plan also affect whether taxes or penalties apply. Moving funds too early or choosing the wrong rollover method may result in ordinary income taxes or additional distribution taxes.
Before taking action, confirming the account start date and understanding how different retirement accounts are taxed can help reduce avoidable mistakes. Direct rollovers are generally used to limit processing issues, especially when moving funds between custodians. Conversions to Roth accounts may be worth evaluating carefully, since they typically increase taxable income for the year.
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