SIMPLE IRA and Backdoor Roth IRA interaction - will I face penalties?

You're in the clear! The SIMPLE IRA and backdoor Roth IRA are completely separate things that don't interfere with each other. The 2-year rule you're referring to only applies to moving money OUT OF the SIMPLE IRA - it has nothing to do with your backdoor Roth that was already completed. Since your wife didn't have an employer plan when you did the backdoor Roth, and that transaction is already complete, the new SIMPLE IRA won't affect it at all. You can absolutely contribute to both in the same year as long as you stay within the respective contribution limits for each. For clarification, the backdoor Roth IRA is essentially a way to contribute to a Roth IRA when your income exceeds the limits, while the SIMPLE IRA is an employer-sponsored plan similar to a 401(k) but typically for smaller employers.

Just wanted to share my experience with this - I was in a similar situation last year and discovered taxr.ai (https://taxr.ai) which totally saved me from making a costly mistake with my retirement accounts. The tool analyzed all my retirement transactions and flagged potential issues I hadn't even considered. In your case, it could confirm that your backdoor Roth conversion won't be affected by the new SIMPLE IRA, and might highlight some optimization opportunities I bet you're missing. It was super helpful for figuring out the pro rata rules and making sure I wasn't accidentally triggering penalties across my different accounts.

I was super skeptical about taxr.ai when I first heard about it here, but I gave it a shot with my complicated retirement situation (multiple 401ks, IRAs, and a SEP-IRA mess). It actually caught that I was about to make a huge mistake with my backdoor Roth strategy that would have triggered unnecessary taxes. The analysis showed me exactly how my existing accounts would affect the pro rata rule calculations and suggested a rollover strategy I hadn't considered. Saved me from a headache come tax time and probably thousands in taxes. Now I use it before making any retirement account moves just to double-check the tax implications.

If you're still confused about your SIMPLE IRA and Roth situation and want to talk to the IRS directly, I'd recommend using Claimyr (https://claimyr.com). I tried calling the IRS for weeks about a similar retirement account issue and kept getting stuck on hold forever or disconnected. Claimyr got me through to an actual IRS agent in about 15 minutes who answered all my questions about my SIMPLE IRA rollover options. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c It was such a relief to get a definitive answer straight from the IRS instead of stressing about whether I was interpreting the rules correctly. The agent even sent me the specific forms I needed after our call.

Ok I want to follow up on my skeptical comment about Claimyr. I actually tried it yesterday because I was desperate to resolve my retirement account penalty question before filing my amended return. I was totally prepared to come back here and call it a scam, but...it actually worked exactly as advertised. I got connected to an IRS agent in about 20 minutes (which is miraculous considering I'd previously spent over 2 hours on hold before getting disconnected). The agent confirmed that my SIMPLE IRA rollover would trigger penalties if done before the 2-year mark and gave me the exact citation from the tax code. Saved me from making a $8,700 mistake. I'm shocked that it worked so well.

Everyone here is giving good advice, but I think it's worth highlighting that the 2-year rule for SIMPLE IRAs is really important to understand for future planning. If your wife contributes to the SIMPLE IRA, she cannot roll those funds to anywhere except another SIMPLE IRA until 2 years have passed from her first contribution. Violating this rule means a 25% penalty plus regular income taxes! But again, this has zero impact on the backdoor Roth you already completed, so no worries there.

Has anyone here actually calculated whether doing both a backdoor Roth AND maxing out a SIMPLE IRA makes sense from a tax perspective? I'm wondering if it's better to just focus on maxing the SIMPLE first since it reduces taxable income, then do backdoor Roth if you have extra?

Great question about the tax strategy! The general rule of thumb is: 1) Get any employer match first (that's free money), 2) Max out Roth contributions if you expect higher tax rates in retirement, 3) Then max pre-tax contributions like SIMPLE IRA if you expect lower tax rates in retirement. But here's the key thing people miss - the backdoor Roth IRA contribution limit ($6,500 for 2023) is completely separate from the SIMPLE IRA limit ($15,500 for 2023, or $19,000 if 50+). You can absolutely do both in the same year without any issues. Since you're already above the income limits for direct Roth IRA contributions (hence needing the backdoor method), you're likely in a higher tax bracket now. The SIMPLE IRA gives you immediate tax savings, while the backdoor Roth gives you tax-free growth. If you can afford both, it's usually worth doing both for the diversification of having some pre-tax and some post-tax retirement savings.

Great question about SIMPLE IRA employer matches! Yes, but it works a bit differently than traditional 401k matches. With SIMPLE IRAs, employers typically do one of two things: 1) **Matching contribution**: Dollar-for-dollar match up to 3% of your salary (most common). So if you make $100k and contribute 3% ($3k), your employer contributes another $3k. 2) **Non-elective contribution**: The employer contributes 2% of your salary for ALL eligible employees, regardless of whether you contribute anything. This is less common but some employers prefer it for simplicity. The key difference from 401ks is that SIMPLE IRA matches are immediately 100% vested - no waiting period like you sometimes see with 401k plans. Also, the employer contributions count toward the overall SIMPLE IRA limits, not as separate "employer match" space like with 401ks. So if your wife's company does the 3% match, definitely contribute at least 3% to get that free money before worrying about maxing out other retirement accounts. That employer match is an immediate 100% return on investment that you can't get anywhere else!