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What are the Withdrawal Rules for My SIMPLE IRA?


SIMPLE IRA stands for Savings Incentive Match Plan for Employees, a type of tax-deferred retirement savings plan, primarily designed for small businesses. It's a cost-effective and straightforward retirement plan for businesses with 100 or fewer employees. Employers have the option of either a non-elective contribution of 2% of the employee's salary or a dollar-for-dollar matching contribution of the employee's contributions to the plan, capped at 3% of their salary.

However, it's worth noting that there are certain drawbacks to SIMPLE IRAs. The business owner's retirement savings potential is less compared to other small business retirement plans like a simplified employee pension (SEP) or a 401(k) plan. Additionally, a two-year waiting period is required before a SIMPLE IRA can be rolled over into a traditional IRA, unlike a 401(k).

Withdrawal Rules for SIMPLE IRA

The withdrawal rules for SIMPLE IRAs align largely with those of Traditional IRAs, with some unique exceptions. Both the contributions and earnings from a SIMPLE IRA can be withdrawn at any time; however, specific penalties may apply depending on the timing and reason for withdrawal.

Penalties for Early Withdrawal

For individuals under 59½ years of age, a 10% penalty fee, in addition to income taxes, is applied to your withdrawal. If an early withdrawal is made within two years of receiving your first employer contribution, the penalty fee increases significantly to 25%.

It's crucial to note the nuances of the "two-year" rule as it can sometimes extend to nearly three years. This happens because employers are allowed to make contributions up until their tax filing deadline, which could be extended to October of the year following the plan year.

Exceptions to Early Withdrawal Penalties

Despite the penalties associated with early withdrawal, there are a few exceptions. If the withdrawal is intended to cover costs such as health insurance while unemployed, college expenses, first-time home-buyers expenses, or disability-related costs, the penalties may be waived. Also, under Rule 72(t), penalties are waived if early withdrawals are a part of annuity payments.

Withdrawals Post 59½ and Required Minimum Distributions

For individuals aged 59½ and over, withdrawals from a SIMPLE IRA will only be subject to income taxes on the withdrawn amount. Once the account holder reaches the age of 70½, they are required to start withdrawing a minimum amount, termed as the Required Minimum Distributions (RMDs).

Transfers from Other Retirement Plans

As of December 2015, SIMPLE IRA accounts are permitted to accept transfers from SEP IRAs, traditional IRAs, and employer-sponsored plans such as a 401(k). This provision offers more flexibility to the SIMPLE IRA holders, allowing them to consolidate their retirement savings.

A SIMPLE IRA presents a feasible retirement savings option, especially for small businesses. However, understanding the rules around withdrawals, including penalties for early withdrawal, exceptions, and the requirements for minimum distributions, is vital to effective retirement planning. As with any financial decision, it's best to seek professional advice to navigate the complexities of retirement savings and choose the best strategy to meet your financial goals.


SIMPLE IRAs have the same withdrawal rules as Traditional IRAs, with one notable exception. SIMPLE IRA contributions and earnings may be withdrawn at any time, but there are certain penalties that apply.

If you are under the age of 59½, you must pay a 10% penalty fee in addition to income taxes on your withdrawal. If the early withdrawal occurs within two years of receiving your first employer contribution, the 10% penalty is increased to 25%.

Since employers don’t have to make contributions until their tax filing deadline, and it could be extended to October of the year following the plan year, the “two year” rule could sometimes be nearly three years.

There are a few exceptions to the early withdrawal penalties, such as paying for health insurance while unemployed, college expenses, first-time home-buyers expenses, disability, and penalties are also waived under Rule 72(t) if early withdrawals are part of annuity payments.

If you are over age 59½, you will only have to pay income taxes on the amount you withdraw. Once you reach age 70 ½, you are required to begin withdrawing a minimum amount, known as Required Minimum Distributions.

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