Converting a SIMPLE IRA to a 401(k): Key Considerations for Growing Businesses

Reallocating funds: Start-up tax credits for eligible businesses and tax-deductible employer contributions available with a 401(k) can free up capital as your business grows.

Recruiting and retention: A more flexible retirement plan can help you compete for top talent as your workforce expands and can help reduce costly employee turnover.

Supporting long-term growth: Higher contribution limits and plan design options may better align with your business’s next stage.

Many small business owners start with a SIMPLE IRA because it’s easy to administer and cost‑effective. But as a business grows, the plan’s limitations—such as lower contribution limits and reduced flexibility—can prompt the question: Is it time to move to a 401(k)?

Does a SIMPLE IRA or a 401(k) make more sense for your small business?

Unfortunately, there’s no universal answer when it comes to whether a SIMPLE IRA or a 401(k) plan will be the best fit for your small business. However, business owners can make an informed decision on which option better suits their company when they understand the key benefits and limitations of both.

A SIMPLE IRA can be a great option for business owners looking for a cost-effective retirement plan for employees. They’re easy to administer and don’t require discrimination testing like 401(k) plans do. However, there are quite a few limitations of a SIMPLE IRA plan sponsors should be aware of:

Requires employer dollar-for-dollar matching contributions up to 3% of compensation or 2% non-elective for all eligible employees
Immediate vesting schedules
No loan options
Must be the only retirement plan the employer has
Only employers with less than 100 employees are eligible, which may mean growing businesses need to look at other retirement savings options for employees
Contribution limits are significantly lower than other retirement savings vehicles

On the other hand, a 401(k) plan offers small business owners a powerful employee attraction and retention benefit, added flexibility in plan design and contribution options, and the highest contribution limits among any retirement savings vehicle.

SIMPLE IRA vs. 401(k)

Understanding how SIMPLE IRAs and 401(k) plans differ can help clarify when a SIMPLE IRA may no longer meet your business needs and whether transitioning to a 401(k) is the right next step.

2026 retirement plan contribution limits

As compensation and profitability increase, the ability to defer and contribute more toward retirement often becomes a key driver for switching from a SIMPLE IRA to a 401(k).

	Type of Retirement Plan
	401(k) Plan	Individual(k) Plan	SIMPLE IRA	SEP IRA
Employee contribution limits	Up to $24,500	Up to $24,500	Up to $17,000	Not allowed
Employer contribution	Flexible, up to 25% of compensation¹	Flexible, up to 25% of compensation¹	Mandatory contribution: generally, a 100% match on deferrals up to 3% of compensation OR a 2% contribution to all eligible employees²	Flexible, up to 25% of compensation¹
Catch-up contributions (in addition to maximum employer + employee limits)	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $8,000 for those aged 50+ OR an increased catch-up of $11,250 for those aged 60-63	Up to $4,000³ for those aged 50+ OR an increased catch-up of $5,250 for those aged 60-63	Not allowed

¹ 25% of compensation for employer tax deduction.

² Employer match may be reduced to as low as 1% for any two out of five-year period.

³ Potential higher catch-up limits for participants in plans maintained by specified small employers.

Note: Employee contributions are not allowed in profit sharing plans and SEP IRAs.

Tax advantages

Both plans offer a variety of tax saving opportunities to employers, including a tax credit of up to $5,000 per year for the first three years of the plan’s life (if it’s your company’s first retirement plan) as well as tax deductible employer matching contributions.

Flexibility for plan sponsors

SIMPLE IRA: Requires a pre-determined employer matching agreement, immediately vested employer contributions, and no loan options.
401(k): More robust plan design features, such as allowing business owners to add vesting schedules, safe harbor provisions, and profit-sharing options.

SIMPLE IRA to 401(k) conversion: Timing rules and key deadlines

While there is no true conversion process, there are a few rules and deadlines you’ll need to follow when discontinuing an existing SIMPLE IRA and opening a new 401(k) plan. Because SIMPLE IRAs operate on a calendar-year basis, timing is one of the most important factors when planning a transition to a 401(k).

The SIMPLE IRA must be the only retirement plan in operation that year and cannot be terminated mid-year. As a result, the soonest you can start contributing to a new 401(k) plan is January 1. To make that possible, you’ll need to take action to formally terminate the SIMPLE IRA so the 401(k) can be effective as of the start of the year.

That’s why October is a key planning window for businesses considering a switch. Beginning discussions with your financial advisor early can help ensure you’re prepared to provide employees with the required notice by the November 2 deadline so that the SIMPLE IRA will be discontinued and a 401(k) can take its place.

SIMPLE IRA rollover and withdrawal rules

There’s another rule small business owners will want to keep in mind when thinking about converting their SIMPLE IRA to a 401(k) plan: the two-year rollover rule. This rule can affect how quickly employees can consolidate their retirement savings and avoid unexpected taxes or penalties during a plan change.

For the first two years a participant is contributing to their SIMPLE IRA, their assets can only be rolled into another SIMPLE IRA. This means that if your SIMPLE IRA has been in operation for less than two years, your contributions cannot be rolled over to a 401(k) until the two-year period has ended.

Go to the IRS website to learn more about SIMPLE IRA withdrawals and transfers.

What happens to employees if I convert my SIMPLE IRA to a 401(k)?

When deciding whether to convert a SIMPLE IRA to a 401(k), employers should also consider how the change will affect employees and their existing savings.

Once the new 401(k) plan is up and running, employees can decide if they’d like to keep their assets where they are (and have the accounts transitioned into a traditional IRA) or roll them over to the new 401(k) plan available to them. However, the rollover can be time-sensitive if employees want to avoid taxes and penalties.

Since the two-year rule is also in effect for employee accounts, if the employee has participated for less than two years, they’ll need to leave their assets in the SIMPLE IRA until they’ve reached the end of the two-year period. If they choose not to leave their assets in the account for the required two years, they’ll be subject to tax penalties.

If the employee has participated in the SIMPLE IRA for two years or more, they can choose to roll their funds over to the 401(k) plan tax-free.

Ready to get started?

Converting a SIMPLE IRA to a 401(k) is often a good fit for growing businesses that are approaching employee count limits, want higher contribution flexibility, or need more plan design options to support long‑term goals.

We offer a simple process for small business owners who want to discontinue their SIMPLE IRA and start a 401(k) plan. A designated representative will help ensure your plan gets off the ground smoothly. From there, you’ll have access to our customer care team, who can answer any questions you or your employees may have.

For more information about our retirement solutions, contact us at 833-893-3233.