[Stacie says: The following information is from Retirement Rules For Employers published by the IRS. Pay particular attention to the 25% additional tax on early distributions – the two year period described below is key to understanding the tax consequences of an early distribution.]
Generally, an early distribution from a SIMPLE IRA is treated the same as one from a traditional IRA; the 10% additional tax on early distributions applies. However, if a distribution is made from the SIMPLE IRA within two years of when contributions were first deposited to the participant’s SIMPLE IRA, the additional tax on early distributions, if applicable, is increased from 10% to 25%. Any rollovers or transfers from a SIMPLE IRA within this 2-year period, unless to another SIMPLE IRA, are also subject to the 25% additional tax on early distributions.
Certain distributions are exempt from any additional tax on early distributions and include the following distributions made:
after the participant is 59 ½ years old;
for unreimbursed medical expenses that are more than 7.5% of adjusted gross income;
in an amount not more than the cost of medical insurance;
after the participant is disabled;
in the form of an annuity;
to pay qualified higher education expenses; and
to buy, build or rebuild a first home.
If the employer terminates a SIMPLE IRA plan before the 2-year period, the 25% additional tax on early distributions still applies. Participants who want to avoid this additional tax have the option of:
leaving the money in their SIMPLE IRA until the end of the 2-year period; or
leaving the money in their SIMPLE IRA until they meet an exception to the additional tax.
Participants can roll over the balance in their SIMPLE IRA to another SIMPLE IRA, but the 25% additional tax on early distributions will still apply for distributions from the new SIMPLE IRA within the original 2-year period. After the 2-year period has been met, SIMPLE IRA assets can be rolled over or transferred to other types of retirement plans, including 401(k) plans, 403(b) plans, 457(b) plans, and traditional and Roth IRAs without being subject to the 25% additional tax on early distributions.
Additional Information on SIMPLE IRA Plans:
Publication 4334, SIMPLE IRA Plans for Small Businesses
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 590, Individual Retirement Arrangements (IRAs)
Retirement Plans FAQs regarding SIMPLE IRA Plans
SIMPLE IRA Plan