You can convert a SIMPLE IRA to a Roth IRA, but only after you’ve participated in your employer’s SIMPLE IRA plan for at least two years. Once that window closes, the mechanics look like any other Roth conversion: the pre-tax amount you move counts as ordinary income in the year of the transfer, and everything after that grows and comes out tax-free if you follow the Roth rules. The timing and the tax planning are where the real money is won or lost.
The Two-Year Waiting Period
Federal law imposes a special holding period on SIMPLE IRA funds before they can move to most other retirement accounts. Under 26 U.S.C. § 72(t)(6), the two-year clock starts on the date your first salary deferral was contributed to the plan.1Office of the Law Revision Counsel. 26 USC 72 – Section: 10-Percent Additional Tax for Early Distributions From Qualified Retirement Plans During those first 24 months, the only place SIMPLE IRA money can go is another SIMPLE IRA. Attempting to move it into a traditional IRA, a 401(k), or a Roth IRA is treated as a distribution.2Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
Each employer’s SIMPLE IRA carries its own two-year clock. If you switch jobs and enroll in a new SIMPLE plan, the new plan’s clock starts fresh, even though the balance from your prior employer is already past its waiting period.3Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
You do not need to quit your job to convert. SIMPLE IRAs allow withdrawals at any time, so once the two-year period is behind you, the conversion can happen while you’re still working and still contributing to the plan.2Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
The 25% Penalty for Converting Too Early
Move SIMPLE IRA funds before the two years are up and you owe a 25% additional tax on the taxable portion of the distribution, assuming you’re under 59½. That’s two and a half times the normal 10% early withdrawal penalty on other IRAs.4Office of the Law Revision Counsel. 26 USC 72 – Section: Special Rules for Simple Retirement Accounts On a $50,000 attempted conversion six months into the plan, the penalty alone is $12,500, on top of the ordinary income tax you’d already owe.
After the two-year mark, the 25% penalty is gone. A properly executed Roth conversion also avoids the standard 10% early distribution penalty, because the IRS treats the move as a rollover rather than a withdrawal, provided the money lands in the Roth IRA through a direct transfer or within the 60-day indirect rollover window.5Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
How to Move the Money
Once the waiting period has passed, you have two ways to execute the conversion. The direct method is safer.
Direct Rollover
With a trustee-to-trustee transfer, your SIMPLE IRA custodian sends the funds straight to your Roth IRA provider. You never touch the money. Most brokerages let you start this online or by submitting a transfer form; you’ll need the receiving Roth IRA account number and the custodian’s name and address. This route eliminates almost every way to accidentally trigger a taxable event.5Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Indirect Rollover
An indirect rollover means the SIMPLE IRA custodian cuts a check payable to you. From the date you receive it, you have exactly 60 calendar days to get the money into a Roth IRA. Miss the deadline and the entire amount is a taxable distribution, with possible early withdrawal penalties on top if you’re under 59½.6Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans There’s no grace period outside a narrow set of IRS hardship exceptions.
Processing typically takes one to three weeks depending on the custodians. The conversion is complete the moment the funds post to the Roth IRA.
How the Conversion Is Taxed
SIMPLE IRA contributions go in pre-tax, so the amount you convert is added to your gross income for the year. Convert $60,000 and your taxable income for that year rises by $60,000, taxed at your ordinary rates. For 2026, a single filer in the 22% bracket (income between $50,400 and $105,700) who converts $60,000 could easily push part of the money into the 24% bracket, which starts at $105,700.7Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The Pro-Rata Rule
If you’ve ever made nondeductible contributions to any traditional IRA, you can’t cherry-pick the after-tax dollars for the conversion. Under 26 U.S.C. § 408(d)(2), the IRS treats all your traditional, SIMPLE, and SEP IRAs as a single pool when it calculates the taxable share of any conversion.8Office of the Law Revision Counsel. 26 USC 408 – Section: Tax Treatment of Distributions Combined balances of $100,000 with $10,000 of after-tax contributions mean only 10% of any conversion comes out tax-free; the other 90% is taxable.
For most SIMPLE IRA holders this is a nonissue, because SIMPLE contributions are entirely pre-tax and the full conversion is taxable. Pro-rata matters only if you also hold traditional IRAs with nondeductible basis. Balances in a 401(k), 403(b), or other employer plan are not swept into this calculation.
Pay the Tax From Outside Funds
A common and expensive mistake is having the custodian withhold taxes from the conversion itself. Convert $60,000 with $12,000 withheld and only $48,000 reaches the Roth. The $12,000 held back is a distribution. Under 59½, it can pick up the 10% early distribution penalty in addition to the income tax you already owe.9Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs Pay the conversion tax from a checking account or other non-retirement source whenever you can.
Avoiding an Underpayment Penalty
A large conversion creates an income spike that ordinary paycheck withholding won’t cover. The IRS safe harbor lets you avoid a penalty in 2026 if your total withholding and estimated payments equal at least 90% of your 2026 liability or 100% of your 2025 tax, whichever is smaller. If your 2025 adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year figure rises to 110%.10Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals
If the conversion happens late in the year, the annualized income installment method on Form 2210 can reduce or eliminate a penalty by showing the income arrived in a single quarter. The cleanest approach is to run the numbers with a tax professional before the transfer and send an estimated payment in the same quarter as the conversion.
Reporting the Conversion
Your SIMPLE IRA custodian will issue Form 1099-R by January 31 of the year after the conversion. Box 7 identifies the transaction with a code: Code 2 if you’re under 59½, Code 7 if you’re 59½ or older. Code S is reserved for distributions taken from a SIMPLE IRA inside the two-year period.11Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
You also file Form 8606 with your federal return. Part II calculates the taxable portion of the conversion, and that figure flows onto Form 1040 as ordinary IRA distribution income.12Internal Revenue Service. Instructions for Form 8606 Keep both forms together. The IRS cross-checks them, and mismatches between the reported distribution and the conversion amount are a common audit trigger.
The filing deadline is the standard April 15, with an automatic six-month extension available on request. An extension buys time to file the paperwork but not to pay the tax on the conversion.13Internal Revenue Service. When to File
The Five-Year Rule on Converted Money
Getting money into a Roth IRA is not the same as being able to pull it back out immediately. For Roth earnings to come out fully tax- and penalty-free, you must be at least 59½ and at least five tax years must have passed since your first contribution to any Roth IRA.14Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
Converted principal has its own separate five-year clock, starting January 1 of the conversion year. Pull converted amounts out before 59½ and before that particular conversion’s five years are up, and the IRS applies a 10% penalty to the taxable portion of the converted money. Once you’re past 59½, the per-conversion clock no longer matters for penalty purposes.
The ordering rules work in your favor. Direct Roth contributions come out first, tax- and penalty-free; then converted amounts in first-in, first-out order; then earnings. Existing Roth contributions cushion any early access needs before you’d touch converted funds.
Watch Out for Medicare Premium Surcharges
If you’re near 65 or already enrolled in Medicare, a conversion can raise your premiums two years later. Part B and Part D premiums include an Income-Related Monthly Adjustment Amount (IRMAA) based on your modified adjusted gross income from two years prior. For 2026, a single filer with 2024 income above $109,000 pays an extra $81.20 per month for Part B, bringing the total monthly premium to $284.10, with steeper surcharges at higher income tiers.15Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
A $100,000 conversion in 2024 could push a retiree earning $90,000 well past the first IRMAA threshold, adding close to $1,000 in extra Part B premiums during 2026. Spreading conversions across several years is the most reliable way to keep each year’s income under the surcharge thresholds.
Building New Roth Savings Inside the SIMPLE IRA
Since 2023, Section 601 of the SECURE Act 2.0 has allowed employers to offer a Roth feature within a SIMPLE IRA plan.16Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 If your employer offers it and you affirmatively elect Roth treatment, your salary deferrals go in after tax and grow tax-free. For 2026, the employee deferral limit is $17,000, or $21,000 with the standard catch-up at 50 or older, or $22,250 for ages 60 through 63.17Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
Employers are not required to add the Roth feature, and employer matching and nonelective contributions still go in pre-tax regardless of your election. This option doesn’t replace a conversion of your existing pre-tax SIMPLE balance, but it does let new contributions accumulate in a Roth bucket while you plan when and how to convert the older money.