Can You Have a SIMPLE IRA and a 401k?

Optimizing retirement savings often involves navigating multiple plan types. A common question is whether one can contribute to both a Savings Incentive Match Plan for Employees (SIMPLE) IRA and a 401(k). This is generally permissible under specific circumstances. Understanding plan rules, especially contribution limits and eligibility, is important for effective financial planning. This article clarifies the conditions for holding and contributing to both a SIMPLE IRA and a 401(k).

Eligibility for Both Plan Types

Participation in both a SIMPLE IRA and a 401(k) depends on the plan source. Both are employer-sponsored, operating under different Internal Revenue Service (IRS) regulations, allowing dual participation. SIMPLE IRAs are for small businesses (100 or fewer employees), involving employee deferrals and mandatory employer contributions (matching or non-elective). 401(k)s are common with larger employers, allowing employee contributions and often employer matches or profit sharing.

The IRS permits contributions to both if plans are sponsored by different employers. For example, an individual with a SIMPLE IRA from one employer and a 401(k) from a part-time job or self-employment can hold both. This distinction enables dual enrollment. Each plan has its own rules regarding eligibility, vesting, and distribution, but federal tax code permits multiple retirement accounts.

Navigating Contribution Limits

When contributing to both, individuals must be mindful of IRS annual contribution limits. Employee elective deferrals to both plans are aggregated under a single overall limit (Internal Revenue Code Section 402). For 2025, the elective deferral limit for most 401(k)s is $23,500, and for SIMPLE IRAs it is $16,500. An individual cannot contribute the maximum to both simultaneously; combined contributions across all elective deferral plans, including 401(k)s and SIMPLE IRAs, cannot exceed the Internal Revenue Code Section 402 limit of $23,500 for 2025.

Individuals aged 50 and over can make additional “catch-up” contributions, which also apply across both plan types up to a combined limit. For 2025, the standard catch-up contribution for 401(k)s is $7,500, while for SIMPLE IRAs it is $3,500. A higher catch-up contribution of $11,250 for 401(k)s and $5,250 for SIMPLE IRAs is available for those aged 60-63, if the plan allows. The total catch-up amount across all plans cannot exceed the applicable overall catch-up limit for the individual’s age group. Exceeding these combined limits results in excess contributions, which must be corrected by distributing the excess amount and earnings to avoid tax penalties.

Distinguish employee elective deferrals from employer contributions. Employer contributions (matching or non-elective) to either plan do not count against the individual’s personal elective deferral limit under Internal Revenue Code Section 402. Instead, employer contributions are subject to separate overall limits under Internal Revenue Code Section 415, which for 2025 is $70,000 for defined contribution plans, or 100% of compensation, whichever is less. An individual’s personal contributions are capped by Internal Revenue Code Section 402, while total contributions (employee and employer) are capped by Internal Revenue Code Section 415.

Common Scenarios for Dual Enrollment

Dual enrollment in a SIMPLE IRA and a 401(k) typically arises from specific employment situations. One common scenario involves working for two different employers. For example, a person might have a 401(k) from a full-time job and a SIMPLE IRA from a part-time job. In such cases, the individual can contribute to both, but total elective deferrals must not exceed the annual Internal Revenue Code Section 402 limit.

Another frequent situation is changing jobs mid-year. They might contribute to a SIMPLE IRA with a former employer, then transition to a new employer offering a 401(k). During this transition, monitoring combined contributions is essential to avoid exceeding the annual elective deferral limit. Total contributions to both plans within the same tax year count towards the single limit.

Self-employment alongside traditional employment also creates dual enrollment opportunities. An individual with self-employment income may establish a Solo 401(k) while working for a company providing a SIMPLE IRA. This allows saving through both a self-directed plan and an employer-sponsored plan. These scenarios highlight how an individual might contribute to both, requiring careful attention to aggregated contribution rules.

Account Management and Interactions

Managing funds across both a SIMPLE IRA and a 401(k) involves understanding rollover rules and distribution tax implications. Funds from a SIMPLE IRA can generally be rolled over into a 401(k) or other eligible retirement plans, but a two-year rule applies. Under Internal Revenue Code Section 408, during the two-year period from first participation in a SIMPLE IRA, distributions can only be rolled over into another SIMPLE IRA. If a SIMPLE IRA distribution is made to a non-SIMPLE IRA or other qualified plan within this two-year period, it is generally a taxable distribution and may incur an additional 25% early withdrawal penalty, instead of the standard 10% penalty for those under age 59½.

After this two-year period, SIMPLE IRA funds can be rolled over into a 401(k), traditional IRA, or other eligible plans without the increased penalty. This allows individuals to consolidate savings, potentially simplifying account management. Rollovers can be direct (funds transferred between institutions) or indirect (funds distributed to the individual, who has 60 days to deposit them). Direct rollovers are preferred to avoid tax withholding and missed deadlines.

Distribution tax treatment for both SIMPLE IRAs and 401(k)s generally aligns with typical retirement plan rules. Distributions from pre-tax contributions and earnings are taxed as ordinary income. Early withdrawals before age 59½ typically incur a 10% additional tax, unless an exception applies. While multiple accounts offer flexibility, some individuals consolidate funds into a single IRA or 401(k) after leaving an employer, streamlining investment management and reducing administrative complexity.