A SIMPLE IRA is a traditional, pre-tax retirement account by default, but since the SECURE 2.0 Act took effect employers can also let employees route their contributions into a Roth account through the same plan. Whether your SIMPLE IRA is traditional or Roth comes down to two things: whether your employer’s plan document permits the Roth option, and, if it does, which treatment you elected on your salary reduction agreement.
The Default: Traditional, Pre-Tax Treatment
SIMPLE IRAs were created under 26 U.S.C. § 408(p) as tax-deferred accounts, and that remains the standard.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts When you elect a salary reduction, your employer moves the money into your SIMPLE IRA before federal income tax is withheld. You don’t pay income tax on those dollars in the year you contribute, and investment growth inside the account isn’t taxed while it stays there.
The tax comes later. Every dollar you withdraw in retirement counts as ordinary income for that year. And once you reach age 73, you have to start taking required minimum distributions from a traditional SIMPLE IRA whether you need the money or not.2Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
If your employer set up its SIMPLE IRA plan before SECURE 2.0 and hasn’t amended the plan document since, this is the only treatment available to you. Every contribution, yours and the employer’s, goes in pre-tax.
When the Roth Option Is Available
Section 601 of the SECURE 2.0 Act allows employers that maintain a SIMPLE IRA plan to let employees direct their salary reduction contributions into a Roth IRA instead of a traditional one.3Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 A useful distinction: the SIMPLE IRA itself doesn’t become a “Roth SIMPLE IRA.” Your contributions flow into a Roth IRA that’s linked to your employer’s SIMPLE plan.
With the Roth election, your contributions are included in your taxable income for the year you make them. You pay tax upfront. In exchange, qualified distributions come out entirely tax-free in retirement, including all the growth. To qualify, the account must satisfy a five-year holding period and you must be at least 59½.4Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
Roth IRAs also aren’t subject to required minimum distributions during your lifetime, so if you don’t need the money at 73, it can keep growing tax-free.
The catch is that the Roth option only exists if your employer’s plan document explicitly permits after-tax contributions. Many smaller businesses have been slow to amend their plan documents, so it’s worth asking your employer directly whether Roth is on the menu before assuming either way.
How to Tell Which One You Have
Two quick checks will settle it. First, look at your paycheck or year-end W-2. If your SIMPLE contributions were withheld before federal income tax and don’t show up in box 1 wages, you’re contributing on the traditional pre-tax side. If the contribution amount is included in your box 1 wages and also appears in box 12 with code S, those are Roth contributions made through the SIMPLE plan.3Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
Second, pull out the salary reduction agreement you signed. That form is where you make the traditional-or-Roth election, and it’s binding until you change it. The standard election period to make or change your choice for the next calendar year runs from November 2 through December 31.5Internal Revenue Service. SIMPLE IRA Plan New employees who become eligible mid-year get their own 60-day election window from the date they first qualify.
What About Your Employer’s Contributions?
Every SIMPLE IRA requires the employer to chip in on top of what you defer, either a dollar-for-dollar match up to 3% of your compensation or a flat 2% nonelective contribution for every eligible employee.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts Those contributions have always gone into the traditional pre-tax side.
Section 604 of SECURE 2.0 changed that too. If your plan document allows it, you can now designate your employer’s matching or nonelective contributions as Roth. When you do, the employer’s contribution becomes taxable income to you in the year it’s deposited.3Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 You take the tax hit now for tax-free withdrawals later. Employer matches and nonelective contributions still stay exempt from Social Security and Medicare taxes when deposited, whichever treatment you pick.6Internal Revenue Service. Retirement Plan FAQs Regarding Contributions – Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare or Federal Income Tax
The election on employer contributions is separate from the election on your own salary reduction. You could keep your contributions pre-tax and route your employer’s match to Roth, or any other combination the plan permits.
Converting an Existing Traditional SIMPLE IRA to Roth
If your employer doesn’t offer the Roth option, or you have a traditional SIMPLE IRA balance you’d like to move, you can convert it to a Roth IRA through a rollover, a trustee-to-trustee transfer, or a same-trustee transfer within one institution.7Internal Revenue Service. Retirement Plans FAQs Regarding IRAs
Two things to keep in mind. The entire converted amount gets added to your taxable income for the year of conversion, so a $50,000 SIMPLE IRA converted at once means $50,000 of extra income on that year’s return. And since 2018, conversions from a SIMPLE IRA to a Roth IRA cannot be reversed; the Tax Cuts and Jobs Act eliminated recharacterization, so the tax bill is final once you convert.7Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Report the conversion on Form 8606.
The Two-Year Rule Blocks Early Rollouts
One important boundary. You cannot roll a SIMPLE IRA into a Roth IRA, a traditional IRA, a 401(k), or any other non-SIMPLE account until two years after you first participated in the SIMPLE plan. During that window, transfers are only permitted to another SIMPLE IRA. A rollover attempted inside the two-year period is treated as a distribution, which means income tax on the full amount plus a 25% additional tax rather than the usual 10%.8Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
The two-year clock runs from the first day you participated in the plan, not from your last contribution. This trips up people who change jobs after a year and try to roll everything into a new employer’s 401(k) or a Roth IRA. If you’re in that first two years and want Roth treatment, your only route is the in-plan Roth election, assuming the plan document allows it.