SIMPLE IRA Rollover Rules: The 2-Year Restriction and Where Your Money Can Go

For the first two (2) years after the date of your first contribution to that SIMPLE plan, you may only roll over or move money from a SIMPLE IRA to another SIMPLE IRA. If you move it anywhere else in this time frame, then you will be subject to income taxes on the amount withdrawn plus a 25% penalty if you're under 59½.^[1] However, once the 2-year rule has passed, then your SIMPLE IRA account balance may be rolled tax-free into a traditional IRA, a 401(k), or a 403(b), or converted to a Roth IRA as a taxable conversion. When rolling or converting funds out of a SIMPLE IRA always use a trustee-to-trustee transfer directly from one retirement plan to another rather than having the monies paid to you personally via check.

How does the 2-year rollover rule work?

SIMPLE IRAs are defined by their 2-year rollover period, which runs from the date a first contribution is made into your SIMPLE IRA.^[1] During this two year window there can be rollovers to other SIMPLE IRAs, and those are tax-free. There can be no rollovers to traditional IRAs, 401(k), 403(b), or Roth IRAs until this window has been completed, because as far as the IRS is concerned that is not a rollover. It is a distribution subject to both ordinary income and, under 59½, the 25% penalty for early withdrawal (same penalty discussed in our SIMPLE IRA withdrawal rules guide). Most custodians will not intervene on your behalf to prevent you from making an unauthorized transfer of assets from one type of IRA to another during the rollover window. Some custodians have processed transfers from SIMPLE IRAs to traditional IRAs during that window without informing you of the impending tax liability which appears when you file your taxes. Therefore, verify your first contribution date prior to transferring any funds out of your SIMPLE IRA.

Where can the money go after 2 years?

Once 2 years have passed since your first contribution, a SIMPLE IRA has all of the same options for transfer and conversion as a traditional IRA. A rollover is permitted without penalty or taxes in order to fund another SIMPLE IRA, traditional IRA, 401(k) or 403(b) that allows rollovers, or a 457(b) offered by an agency of the government, and it may be converted to a Roth IRA on a taxable basis.^[2] The most typical option for moving money is to do so directly through a rollover into a traditional IRA in order to consolidate accounts if you switch jobs. Since the funds were entered into the plan on a pre-tax basis they will continue to remain pre-tax upon their movement. Additionally, provided you follow proper procedures and avoid taking possession of any of those monies prior to depositing them in your new account (you receive no cash distribution), then there is no income tax liability associated with such direct transfers. The total list of permissible destinations includes:

You can convert to a Roth after two years. Sometimes it makes sense in a low income year but then you'll be taxed on all of the pre-tax dollars converted into your income for that year. There's no penalty for converting at any age, only the tax owed. If you contribute to a Roth SIMPLE IRA (introduced by SECURE 2.0), those dollars are already Roth, as per Roth SIMPLE IRA.

Can you roll a SIMPLE IRA into a 401(k)?

Yes, as long as it has been at least 2 years since your initial contribution. Once you are past the 2 year mark, there will be no taxes associated with this rollover into a 401(k), whether the plan belongs to your present employer or your new employer. Prior to reaching the 2 year mark, any such transfer would result in a taxable distribution with an additional 25% penalty under 59½,^[1] therefore please confirm that date before making such a move. The recipient plan also has two stipulations: that the 401(k) allows incoming rollovers, so ask the plan administrator, and that the rollover should go directly from trustee-to-trustee of the original account payable to the new plan. Rollover money flows both ways. A traditional IRA (or 401(k)) may roll over into a SIMPLE IRA, but only once that SIMPLE IRA has reached its own 2-year mark.

Should you use a direct transfer or a 60-day rollover?

Always complete a direct transfer of the funds (a "trustee-to-trustee" or "custodian-to-custodian" transfer). There are two methods for transferring assets held in an Individual Retirement Account ("IRA") and the two are not equal. A trustee-to-trustee (or custodian-to-custodian) transfer involves moving money directly from the custodian of one IRA to another without giving you any money. It has no dollar limit, no frequency limit, no withholding, and no deadline. However, a 60 day rollover will result in a taxable distribution and possible penalty if the entire rollover amount does not arrive at the new custodian within 60 days after receipt by you. Furthermore, there can be only one indirect IRA-to-IRA rollover per rolling 12 month period between all of your IRAs combined. If a trustee-to-trustee transfer fails, it will simply require some additional paperwork to correct. However, if a 60-day rollover fails, you could have created a taxable distribution subject to penalties and taxes. To safely perform this process: confirm your first-contribution date into the account(s), open an account at your destination institution and confirm that their systems allow them to accept incoming rollovers, initiate the trustee-to-trustee transfer from your receiving institution, and verify that the balance arrived coded as a transfer rather than a distribution. Never take a check made payable to yourself personally!

What happens when you change jobs?

You may be surprised by how little leaving the employer of your SIMPLE IRA impacts you. Although the plan has been sponsored by an employer, it was always yours at a custodian. Thus, it will remain open after your separation with the same investment(s) as well as continue to grow. Your 2-year clock will still run based on the first contribution date, therefore if you leave 18 months into your time at this employer, you would need to wait only six additional months prior to transferring your funds to either a traditional IRA or 401(k) offered by your new employer. If your new job also offers a SIMPLE IRA, you can transfer the funds immediately since moving from one SIMPLE IRA to another is permissible anytime. If instead your employer replaces the SIMPLE IRA with a safe harbor 401(k) during the middle of the year (as permitted under SECURE 2.0), then your balance does not automatically follow into that safe harbor plan, and the same 2-year rule decides when you can roll it in. Consider making a move? First go through What Is a SIMPLE IRA? or the SIMPLE IRA vs. 401(k) comparison.

The Bottom Line

A SIMPLE IRA is locked to SIMPLE-to-SIMPLE moves for 2 years from the date you make your first contribution and any other rollover within this time frame will be treated as a taxable distribution with an additional 25% penalty under 59½. After these 2 years, it can roll over freely into a traditional IRA, a 401(k), or do a Roth conversion. First confirm the date you made your first contribution, then let the clock run its course and always use a direct trustee-to-trustee transfer.

This guide is educational and summarizes IRS rules for SIMPLE IRA plans. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Talk to your tax advisor about your business's circumstances.