Have a SIMPLE IRA? Here’s a Simple Way to Move to a 401(k)

Many small businesses end up with a SIMPLE IRA because it looked like the easy choice at the time. But that choice comes at a cost. Lower contribution limits, a rigid employer contribution formula, and almost no design flexibility can leave real tax savings on the table, especially for owners. The more profitable your business becomes, the bigger that gap gets.

If that sounds familiar, the good news is that moving from a SIMPLE IRA to a 401(k) is easier than most business owners expect. Timing matters, though. If you want a new 401(k) in place on January 1, 2027, your employees must be notified before November 2, 2026.

Where the SIMPLE IRA Falls Short

A SIMPLE IRA may look easy on the surface, but it comes with real limitations:

• Lower contribution limits. Employees can defer $17,000 in 2026 (up to $18,100 for some smaller employers), compared to $24,500 in a 401(k).

• Smaller catch-up contributions. Savers age 50 and older can add $4,000 in a SIMPLE IRA versus $8,000 in a 401(k).

• A fixed employer contribution. You must either match up to 3% of pay or contribute 2% of pay for every eligible employee each year, with no option to add a discretionary profit-sharing contribution on top.

• Immediate vesting. Every employer dollar belongs to the employee on day one, even if they leave after a few months.

SIMPLE IRA vs. 401(k) at a Glance (2026)

Feature	SIMPLE IRA	401(k)
Employee deferral limit	$17,000 ($18,100 for some small employers)	$24,500
Catch-up, age 50+	$4,000	$8,000
Catch-up, ages 60–63	$5,250	$11,250
Employer contributions	Required: match up to 3% or 2% of pay	Flexible: match, safe harbor, and/or discretionary profit sharing
Total annual limit per person	Deferrals plus the required employer contribution	$72,000, plus catch-up contributions
Vesting schedule for employer money	Not allowed (always 100% vested)	Allowed
Participant loans	Not available	Optional
Contributions weighted toward owners	No	Yes, subject to IRS testing

The Tax Benefits of Making the Switch

Bigger tax-deferred savings for owners

A 401(k) with a profit-sharing feature lets owners and key employees contribute far more before taxes. Employer contributions are generally deductible up to 25% of eligible payroll, and employee deferrals don’t count toward that limit.

More control over what you contribute

A SIMPLE IRA locks you into the same employer contribution every year. A 401(k) can include a discretionary profit-sharing contribution that you decide on after you see how the year turned out. Employer contributions can generally be made as late as your tax filing deadline, including extensions, and still be deducted for the prior year.

Plan design that rewards the people you want to keep

401(k) plans can use allocation formulas that direct more of the employer contribution to certain groups, such as owners or long-tenured staff, as long as the plan passes IRS nondiscrimination testing. Vesting schedules on profit-sharing dollars also give employees a reason to stay.

Roth flexibility

The 401(k) plans offer a Roth option, giving employees a choice between a tax break now and tax-free income in retirement. Employees who earned more than $150,000 in FICA wages in the prior year must now make any catch-up contributions as Roth contributions, and a 401(k) is built to handle that.

Tax credits

Businesses that add automatic enrollment to their 401(k) can claim a $500 tax credit each year for three years. This helps with the initial start-up costs of beginning a 401(k) plan.

A Quick Example

Consider the owner of an S corporation who is 52 years old and pays herself a W-2 salary of $140,000. Here is how much she could save toward retirement under each plan in 2026:

	SIMPLE IRA	401(k) with profit sharing
Employee deferral	$17,000	$24,500
Catch-up (age 50+)	$4,000	$8,000
Employer contribution	$4,200 (3% match)	$35,000 (25% of pay)
Total	$25,200	$67,500

That’s $42,300 more going in on a tax-deferred basis. At an assumed 24% federal tax bracket, that works out to roughly $10,000 in federal income tax deferred for the year, before any state tax savings.

This example is for illustration only. A profit-sharing contribution this large requires a plan designed to allow it and usually means contributions for eligible employees as well. The right design depends on your census, budget, and goals.

Two Ways to Make the Move

1. Year-end transition. Notify employees before November 2 that the SIMPLE IRA will end on December 31, then start the 401(k) on January 1. This is usually the cleanest option.

2. Mid-year replacement. Under SECURE 2.0, you can end a SIMPLE IRA partway through the year if you replace it with a safe harbor 401(k) that starts the next day. Advance notices are required, and contribution limits are prorated for the transition year. In this case, employees can roll their SIMPLE IRA balances into the new 401(k) even within the two-year window.

The “Simple” Way: 401(k) Simple

A common myth is that a 401(k) is too complicated or too expensive for a small business. With the right partner, it doesn’t have to be. That’s where 401(k) Simple comes in. FPG Tax & Accounting works with a “Simple 401(k)” solution, a pooled retirement plan that reduces cost and liability and administration. This is what we offer our own employees and we’d like to make the same solution available for our clients.

401(k) Simple is designed to take the heavy lifting off your plate:

• Conversion support: plan setup, employee notices, and the move from your SIMPLE IRA

• Day-to-day administration: enrollment, payroll data integration, and deferral management

• Fiduciary protection: professional fiduciaries take responsibilities off of you

• Pooled pricing: the program’s scale helps keep costs competitive

Meanwhile, FPG Tax makes sure the tax side works for you, from deduction planning and contribution timing to claiming the credits you qualify for.

Have you outgrown your SIMPLE IRA?

It’s possible that the SIMPLE IRA you started no longer fits. A company can outgrow the SIMPLE IRA by having too many employees, or by needing a more sophisticated plan for recruitment and retention of the right employees, or by needing higher savings opportunities for owners and key employees.

If your business still offers a SIMPLE IRA, it may be costing you and your employees valuable tax savings. Moving to a 401(k) can increase your tax-deferred savings, give you more control over employer contributions, and help you attract and keep good employees. With a year-end deadline approaching, now is the time to look at your options.

Check out www.401kSimple.com to learn more. If you have questions about the tax benefits of moving from a SIMPLE IRA to a “SIMPLE 401(k),” please call FPG Tax & Accounting at (816) 941-2900 or email jessica@fpgtax.com.