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The Switch: SIMPLE IRA to a 401(k) Plan

7 Things to Consider Before Switching from a SIMPLE IRA to a 401(k) Plan

Many businesses looking to start a retirement plan for their employees choose to utilize the SIMPLE IRA plan. There are several reasons business owners make this decision, including the low administration burden and reduced cost. However, as a company grows it may be more beneficial and cost effective to utilize a 401(k) retirement plan.

Below are several reasons why a 401(k) plan might be the better option for you and your employees.

  1. Employee limitation. If you have more than 100 employees, you are not allowed to have a SIMPLE IRA plan.
  2. Employee contribution limits. The SIMPLE contribution limit is $13,000 and $3,000 for a catch-up contribution (those age 50 or older), while 401k limits are $19,000 and $6,000.  If you have employees, including yourself, who would prefer to contribute more than the SIMPLE limit, you should consider a 401(k) plan.
  3. Employer contributions. If company profitability improves and you would like to share it with all or some employees by putting it into their retirement plan, a 401(k) plan is required. This is not possible with a SIMPLE. 
  4. Eligibility. Many times, part-time employees or employees under the age of 21 must be included in a SIMPLE plan. However, it’s possible to restrict part-time or certain classes of employees with a 401(k) plan.
  5. Administration. If you allow employees to choose where to open their SIMPLE IRA accounts, the administration of transferring money to several firms could become challenging. A 401(k) plan simplifies this burden by allowing the owner/trustee to select where the plan will be invested.

There are many great reasons to make the switch to a 401(k) plan, but there are things you need to know before switching plans.

  1. A SIMPLE IRA plan must be the only retirement plan in effect during the year.
  2. SIMPLE IRA plans need to be terminated by year-end.
  3. SIMPLE IRA plans cannot be terminated mid-year.
  4. You must give employees a 60-day notice (by November 1) that the SIMPLE IRA plan will be terminated at the end of the year.
  5. If the employee notification does not happen by November 2, 2019, for instance, a 401(k) plan cannot commence until January 1 of the year 2021. 
  6. The SIMPLE IRA plan provider should be notified of the plan termination and made aware that contributions will not continue after year-end.
  7. There is a two-year rule for all SIMPLE accounts.  A 25% penalty applies if an employee closes or transfers a SIMPLE IRA to a Traditional IRA or 401(k) before two years has passed since the date the SIMPLE IRA account was opened.

Stephen Palm, CFP®


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.