General Distribution Rules

Distributions from a SIMPLE IRA are generally taxed like distributions from a traditional deductible IRA. Distributions are fully taxable when the participant withdraws funds; premature distributions are subject to a 10% penalty tax; and required minimum distributions must begin no later than April 1 of the year following the year the participant reaches age 73 (SECURE Act 2.0; age 75 for those born after 1959 beginning in 2033).

§ SIMPLE 401(k) difference: The two-year restriction on rollovers described below does not apply to SIMPLE 401(k) plans — only to SIMPLE IRAs.

The Two-Year Restriction

SIMPLE IRAs impose a special two-year restriction on distributions that applies from the date of the employee’s first contribution to the plan.

First Two Years of Participation
Premature distributions (before age 59½) are subject to a 25% penalty tax — in addition to ordinary income taxes. This replaces the standard 10% IRA penalty during this period.
After Two Years
The penalty reverts to the standard 10% premature distribution penalty applicable to all traditional IRAs. Normal IRA distribution rules apply.
Important: The 25% penalty applies to premature distributions only. It does not apply to withdrawals made after age 59½, due to death or disability, or under any other exception to the 10% premature distribution penalty.
Effect on Rollovers

The two-year restriction also affects how and where SIMPLE IRA funds may be rolled over:

  • During the first two years: a distribution may be rolled over only from one SIMPLE IRA to another SIMPLE IRA. Rollovers to regular IRAs or other plan types during this period are subject to the 25% penalty. The penalty also applies to direct trustee-to-trustee transfers to non-SIMPLE IRAs during the first two years.
  • After two years: a participant may roll a distribution from a SIMPLE IRA into a regular (non-SIMPLE) IRA or other eligible plan without penalty.
Assets held in a SIMPLE IRA (after the two-year period) may also be rolled over into other types of qualified plans, 403(b) tax-sheltered annuities, and deferred compensation plans of state or local governments (Section 457 plans). The trustee must disclose rollover procedures in the plan summary provided to employees.
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