Withdraw from a SIMPLE IRA

A SIMPLE IRA plan is offered to employees of businesses with 100 employers or less. Employees must have earned at least $5,000 during the preceding year, and expect to earn at least that much in the current year. The rules and penalties for withdrawing from a SIMPLE IRA are similar to those for traditional IRAs, except for the unique "2 year rule" which puts a higher penalty on withdrawals made within the first 2 years of participation.

Steps

Withdrawing from a SIMPLE IRA

  1. Notify your employer. If you decide to withdraw, you should contact your employer and explain that you would like to withdraw funds from your SIMPLE IRA. You can make a withdrawal at any time and still continue to contribute to the plan, even after you take some money out. Your employer will provide you with the required forms.[1]
    • Different companies will have their own versions of the form for you to fill in.
    • Speak to the HR department and ask them to provide the correct form for you.
  2. Fill out the paperwork. Fill out the forms required from your employer, and the financial institution that manages your plan. You will need to provide your contact information and social security number, and detail the amount you plan to withdraw. By completing and signing the form you are affirming that you acknowledge and understand the taxes and penalties that will be deducted from an early withdrawal.
    • Your employer is required to provide you with all the information you need to make a withdrawal.
    • This will include the contact details for the financial institution which manages your SIMPLE IRA.[2]
    • Most plans will take 4 to 6 weeks to process your withdrawal and taxes. For faster processing, elect to have your money deposited directly into your checking account.
  3. Consider transferring money to another IRA. An alternative to making a withdrawal is to transfer money from your SIMPLE IRA to another retirement account. You can do this tax-free if you meet the conditions. You can transfer it to an employment-sponsored retirement plan, such as a 401(k), 403(b), or governmental 457(b) plan.
    • If you are in the first two years of your SIMPLE IRA, you can only transfer money to another SIMPLE IRA.
    • If you make a transfer to a different account it is considered a withdrawal. In this case you will be required to include the amount in your gross income.
    • Withdrawals within the first two years of participation will incur an additional 15% penalty in addition to the standard 10% penalty for early withdrawals unless you qualify for an exception.
    • After the first two years you can make a transfer to a Roth IRA. But you must include the distribution in your income for tax purposes.[3]

Determining the Rules and Costs for Withdrawal

  1. Find out if you are withdrawing early. SIMPLE IRAs are designed to encourage people to save for retirement, and withdrawing early incurs certain tax penalties. If money is withdrawn by somebody who is less than 59-1/2 years, then this is considered an early withdrawal.[4]
    • If you are under 59-1/2, and don’t qualify for an exception, you will have to pay an extra 10% tax on the money you withdraw.
    • If you are over 59-1/2, you will only need to pay income tax for the year that the funds were paid to you.[5]
  2. Determine if you are within the first two years of the plan. If you wish to withdraw from your SIMPLE IRA within two years of joining the plan you will face additional tax penalties. Under this two year rule, the rate of additional tax is lifted from 10% to 25%. The two year period is calculated from the first day that your employer deposits into your SIMPLE IRA.[5]
    • Be sure to check with your employer if you are at all uncertain about when the first deposits were made.
    • The extra cost is significant, and is meant as an disincentive for people to withdraw early from their SIMPLE IRAs.[4]
  3. Understand the exemptions for early withdrawal. Before you go any further, you should find out if you qualify for any exemptions which could reduce or eliminate the costs of early withdrawal. You will not have to pay the additional 10% or 25% tax to withdraw if you are older than 59-1/2, you are disabled, or your withdrawal is a qualified reservist [6] You won’t have to pay tax if the withdrawal is in the form of an annuity, the result of an IRS levy, or you are the beneficiary of a deceased SIMPLE IRA owner.[5] You will be exempt if the amount of the withdrawal is not more than:
    • Your reimbursed medical expenses that are higher than 10% of your gross income. This is adjusted to 7.5% if you or your spouse is 65 or over.
    • Your qualified higher education expenses.
    • Your cost for medical insurance while you’re unemployed.
    • The amount to buy, build, or rebuild a first home (up to $10,000).[5]

Tips

  • You can avoid taxes and penalties by rolling over your Simple IRA distribution into another IRA after 2 years of participation.
  • Consider getting help from a tax professional or financial planner. Experts in retirement funds can advise you on the best times to withdraw, and offer alternatives that may help you avoid additional taxes and penalties.

Warnings

  • Taking loans from a Simple IRA are not permitted. Any money taken out of the plan will be considered a withdrawal.

Things You'll Need

  • Withdrawal forms

Related Articles

  • Roll over Assets Into a Traditional IRA

Sources and Citations

  1. ↑ https://www.irs.gov/Retirement-Plans/Operating-a-SIMPLE-IRA-Plan
  2. ↑ https://www.irs.gov/pub/irs-pdf/f5304sim.pdf
  3. ↑ https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Distributions
  4. ↑ 4.0 4.1 http://law.freeadvice.com/tax_law/income_tax_law/tax_ira_plan.htm
  5. ↑ 5.0 5.1 5.2 5.3 https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Distributions
  6. ↑ https://www.irs.gov/publications/p590b/ch01.html
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