What is the Penalty for Early Withdrawal From a Simple IRA?

A SIMPLE IRA is a way for small-business owners to provide a retirement plan for their employees. The employees can choose to make pretax contributions to an IRA, and the employer makes required contributions as well.

Function

As with a Traditional IRA, contributions and earnings on investments in a SIMPLE IRA grow tax-deferred and are taxed as ordinary income when withdrawn.

Features

Distributions taken before age 59 1/2 are subject to a 10-percent penalty. However, distributions taken within two years of establishing the plan carry a 25-percent penalty, unless the holder is age 59 1/2 or older (no penalty applies in this case).

Considerations

The two-year waiting period and 25-percent penalty also apply to transfers or rollovers to other retirement plans, except to another SIMPLE IRA.

Benefits

The early-withdrawal penalty may be waived under certain circumstances, including a first-home purchase, disability or certain medical or higher-education expenses.

Warning

You must begin taking taxable required minimum distributions (RMDs) at age 70 1/2. RMD amounts not taken when due are subject to a 50-percent penalty.

References

• Investopedia: SIMPLE IRAs Introduction
• IRS: Retirement Plans FAQs Regarding SIMPLE IRA Plans