Simple IRA

Submitted by michael steinebach on Thu, 2023-06-08 19:35

Client opened a Simple IRA plan 10 years ago. Client transferred Simple IRA to new custodian 1 year ago.

If we establish Solo 401(k) plan, can client roll all of his money from Simple IRA to Solo 401(k) plan without incurring the 25% penalty? I want to make sure the move from 1 custodian to another would not result in a penalty…

We will be closing the Simple IRA Plan.



Submitted by Alan - IRA critic on Thu, 2023-06-08 22:44

Client has met the 2 year requirement, but the current SIMPLE custodian may or may not recognize the prior years. If not, and the custodian enters Code S on the 1099R, the client will have to override the penalty by filing Form 5329 and using Code 12 to explain the exception. Client will also need to include an explanatory statement regarding the rollover to the 401k plan since a S coded distribution is not eligible for rollover. Client should attempt to have the custodian recognize the prior SIMPLE IRA participation years. In addition, if any SIMPLE IRA contribution have been made for 2023, the 401k cannot receive a contribution until Jan, 2024.



Submitted by michael steinebach on Fri, 2023-06-09 11:11

Okay – so to avoid this, can I leave the Simple IRA open?  Client made contributions to Simple IRA for 2022 in the calendar year 2023.  No elective or matching deferrals went into SIMPLE IRA that count towards 2023.   I think it may be best to leve SIMPLE IRA open for 2 years, then roll into 401(k).  We will make contributions to Solo 401(k) for 2024.  



Submitted by Alan - IRA critic on Fri, 2023-06-09 15:16

  • Yes, the SIMPLE IRA can be left open and contributions for 2023 can be made, even in 2024. If elective deferrals are to be made to the solo K in 2024, that plan must be adopted by 12/31/2024 along with an election regarding the amount of 2024 elective deferrals. A solo K can still be adopted for 2023 and contributions made for 2023 as long as no SIMPLE IRA contributions are made for 2023.
  • The rollover is a different situation if the SIMPLE Custodian will not recognize the prior holding period. While that can present tax filing issues to get the penalty waived, if the client also wants to do a backdoor Roth IRA, the conversion will be taxable if the SIMPLE IRA still has a balance at the end of the conversion year. Otherwise, it is no problem to wait on the rollover until 2 years has passed since the first contribution was made to the current custodian’s SIMPLE IRA. The existence of the SIMPLE IRA is not a problem for the solo K adoption as long as no contributions are made to the SIMPLE IRA for that year.


Submitted by William Tuttle on Sat, 2023-06-10 00:25

SECURE Act 2.0 enacted two changes. One certainly relevant and one questionable.

  1. Section 317 extended the 401k adoption and employee deferral deadline for sole proprietors and default single member LLCs to their tax filing deadline without extensions.
  2. Section 332 allows the mid year replacement of a SIMPLE IRA with a 401k plan with mandatory employer contributions. It remains to be seen if it can apply to a one participant 401k.


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