Converting a SIMPLE IRA To A 401(k)

Converting a SIMPLE IRA To A 401(k)

May 02, 2018

Many small businesses choose a SIMPLE IRA as their first employer-sponsored retirement plan. They are a good beginner plan because they are cheaper than 401(k)s, quicker and easier to set up, and are overall, like their name, more simple.

Why Change to a 401(k)?

However, sometimes growing companies find themselves restricted by their SIMPLE IRA plan. They can only be used by companies with 100 or fewer employees. They cannot be combined with other plans like profit-sharing or money purchase plans. They also have lower contributions limits, less flexibility, and fewer options than 401(k) plans.

If you have clients with SIMPLE IRA plans that are feeling constrained, it may be time for them to convert to a 401(k). Of course, changing from a SIMPLE IRA to a 401(k) isn’t as easy as just relabeling everything.


Except for the first year of its existence, a SIMPLE IRA must be maintained for a full calendar year. That means your client can’t just decide to terminate the plan mid-year and switch to a 401(k), but they have to plan ahead and keep making promised contributions through the end of the year. Then, they can end the plan on December 31 and begin their new plan in the new year.

By law, a company cannot have both a SIMPLE IRA and a 401(k) in the same calendar year. However, they should begin the process of setting up the 401(k) while they still have the SIMPLE IRA so that it is ready to go on the first of the year. It usually takes 30-60 days to set up a new 401(k), so if they wait until they have terminated the SIMPLE IRA to begin establishing the 401(k) they will have a gap between the effective dates of the two plans.


Employees must be notified by November 2 when a plan is being terminated at year end. The law states that all participants must have at least 60 days notice that the SIMPLE IRA will be discontinued starting January 1.

Your clients will also need to notify their plan’s financial institution and their payroll provider that contributions will cease in the new year. The IRS, however, does not require any notification. As always, they should keep well-documented records of the decision and all actions taken.

Rolling Over Funds

Plan participants may not be able to immediately roll their SIMPLE IRA funds into the new 401(k) plan. Money cannot be rolled from a SIMPLE IRA into another kind of qualified retirement plan for at least 2 years after the account was first funded, per IRS rules.

So, any employees who have not been participating in the SIMPLE IRA for at least 2 years can only roll their money into a traditional IRA. Otherwise, they will be subject to a 25% penalty and the distribution will be treated as taxable income. Because of differing tax treatments, SIMPLE IRAs also cannot be rolled into Roth 401(k)s, only traditional ones. (1)

Working With a Pension Specialist

While it can be a wise business decision, converting a SIMPLE IRA to a 401(k) plan can be quite a headache for business owners and their financial advisors. There are a lot of rules, regulations, and deadlines that must be adhered to.

Because of this, many people seek the help of a pension specialist. Working with someone who specializes in retirement plans and is well-versed in the laws regulating them makes the transition both quicker and easier for everyone involved.

If you would like to know more about how a pension specialist can help you and your clients, email me today at Together we can discuss your client’s unique situation and how we can partner together to help them sponsor the best possible retirement plan for their business.

About Kenny Phan

Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.