How to complete a SIMPLE IRA rollover to Roth IRA

A SIMPLE IRA (short for Savings Incentive Match Plan for Employees) is a retirement account opened by an employer on behalf of its employees. While only smaller employers (<100 employees) can offer SIMPLE IRAs, this type of retirement plan provides small employers with a simplified way to contribute toward their employees’ and their own retirement savings. 

However, even though it’s called an IRA (individual retirement account), the plan remains under control of your employer — even after you leave the company. But once you leave, you have the option to roll that money to a different retirement account. You have the choice of sending those funds to another employer retirement plan (I.e. 401(k) or 403(b)) or a traditional IRA without paying taxes now. 

However, if you’d rather pay the tax now, you can roll the funds into a Roth IRA. By paying the taxes on those funds now, the principal amount in the account will now be after-tax dollars and the earnings in the account could be withdrawn tax-free as long as they are qualified distributions. And you won’t have to pay taxes on distributions if you follow the Roth IRA’s tax rules. 

However, there are several nuances to this process that this article will cover, including: 

  • The IRS regulations on rolling over a SIMPLE IRA 
  • The SIMPLE IRA two-year rule 
  • Reasons to convert a SIMPLE IRA to a Roth IRA 
  • How to complete a conversion from SIMPLE to Roth IRA

Can you convert a SIMPLE IRA to a Roth IRA? 

The answer is yes, but there are some rules that you must follow to convert a SIMPLE IRA to a Roth IRA. You will owe taxes on the amount rolled over, as you’re moving pre-tax contributions and putting them into a post-tax investment account. Your SIMPLE IRA must also be at least two years old. 

You may only be allowed one rollover per year during this process, which are detailed below. 

But the good news is that this amount you roll over doesn’t count towards your yearly IRA contribution limits. 

SIMPLE IRA rollover rules 

First, there is the SIMPLE IRA two-year rule, which states you’re not able to complete a rollover during the first two years of your initial contribution. If you wait until after the two year period, you can complete tax-free rollovers to any non-Roth IRA. If you decide to roll into a Roth IRA after the two-year period, you will need to include any untaxed funds in your gross income for that tax year. 

However, if you move funds from one SIMPLE IRA to another, you won’t incur any taxes or penalties. 

But if you clear the two-year window, you can move your funds to a Roth IRA without any penalties. You will simply have to include the taxable portion of your rollover in your taxable income for that year.   

How to convert a SIMPLE IRA to a Roth IRA 

To convert a SIMPLE IRA to a Roth IRA, you should first contact the plan administrator for the SIMPLE IRA to make certain that you have passed the two-year limitations period. Plan administrators use different dates to calculate when you have met the requirements of the rule. 

Once you have satisfied the two-year rule, you can open a Roth IRA account and then fill out paperwork with the administrator of your SIMPLE IRA to send a check directly to your new Roth plan.  

Potential benefits of converting a SIMPLE IRA to a Roth IRA 

When you convert a SIMPLE IRA to a Roth IRA, there can be several benefits. While you will have to pay taxes when you convert a SIMPLE IRA to a Roth IRA, the money that is held inside of your Roth account can grow tax-free. You won’t be required to take mandatory distributions or pay taxes on the distributions that you choose to take when you’re retired. This means once you hit 59.5 years old, qualified funds within a Roth IRA are yours to use without any additional taxes or penalties. 

A rollover is only one of your options for your retirement account, please see IRS guidance about rollovers for additional details/considerations.

All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. M1 does not provide any financial advice.  

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