The SIMPLE IRA has slightly different withdrawal rules than other retirement plans. Much of it works the same way, but there’s an extra provision that prevents withdrawals from the account within two years of opening it.

How to withdraw from a SIMPLE IRA without penalties

A SIMPLE IRA has similar withdrawal rules as a traditional IRA or SEP IRA.

You must be at least 59½ years of age in order to take a qualified distribution from your plan without any penalties. If you withdraw early, the withdrawn amount is hit with a 10% penalty plus income taxes. Most retirement accounts follow this rule. 

However, the SIMPLE IRA also has an additional 2-year rule for withdrawals. If your account is under 2 years old, and you’re under 59½ years of age, the 10% penalty gets increased to 25%.

For example, let’s say that you’re 45 years old with a SIMPLE IRA that’s been opened just under a year ago. You decide to take a distribution of $10,000 from your SIMPLE IRA. In this case, you would owe $2,500 in penalties and have to pay regular income taxes on the $10,000 that was withdrawn.

When does the 2-year period start?

The 2-year period starts when you receive your first contribution from your employer.

What if I’m over 59½ years old, but my account is under 2 years old?

The 2-year rule penalty only applies on top of the early distribution penalty. You don’t have to pay any penalties if you are over the age of 59½ since you wouldn’t be required to pay the 10% early distribution tax in the first place.

SIMPLE IRA rollover rules

With rollovers, the 2-year rule applies whether or not you’re 59½ years old. If it’s been less than 2 years since your account received its first contribution from your employer, then the 25% tax is applied on all rollovers.

To rollover funds from a SIMPLE IRA to another retirement account, you must wait at least 2 years in order to avoid paying the 25% penalty tax.

Once the two years has passed, you can rollover your SIMPLE IRA funds to another non-Roth IRA (like a traditional IRA or SEP IRA), an employer-sponsored plan (like a 401k), or a solo 401k. Transfers to a non-Roth retirement plan are tax-free and penalty-free, but if you convert the funds to a Roth retirement account, you’ll have to pay income taxes.

Only rollovers to another SIMPLE IRA are fine

The only rollovers that you can perform without any penalties during the 2-year period is a rollover to another SIMPLE IRA. Only SIMPLE IRA to SIMPLE IRA transfers can be done penalty-free if your account is under 2 years old.

What if I leave my employer before the 2-year period ends?

If you leave your employer while your SIMPLE IRA is still younger than 2 years old, you will have to wait until 2 years have passed in order to rollover funds to another retirement account.

However, since transfers to another SIMPLE IRA are okay, if your new employer also provides a SIMPLE IRA, you could simply transfer the funds to the new plan without penalties.

Penalty exceptions

There are certain instances where, even if you’re under the age of 59½ and your account is under 2 years old, early withdrawals could be penalty-free.

  • Your withdrawal is in the form of an annuity.
  • Your withdrawal is a qualified reservist distribution (you were called to active duty for a period of at least 179 days or for an indefinite period).
  • The withdrawal is the result of an IRS levy (An IRS levy permits the legal seizure of your property to satisfy a tax debt).
  • You become disabled.
  • You are the beneficiary of a deceased SIMPLE IRA owner.
  • Your withdrawal is being used, but the amount does not exceed your cost for medical insurance while unemployed, qualified higher education expenses, unreimbursed medical expenses that exceed 10% of your adjusted gross income, or to buy, build or rebuild a first home.