Chapter 7 — Distributions

Distributions from a SIMPLE IRA are generally taxed the same as distributions from a traditional, deductible IRA:

• Distributions are fully taxable as ordinary income in the year received.
• Premature distributions (before age 59½) are subject to a 10% early withdrawal penalty, subject to the standard IRA exceptions (death, disability, substantially equal periodic payments, first-time homebuyer, unreimbursed medical expenses, etc.).
• Required minimum distributions (RMDs) must begin by April 1 following the year the participant turns age 73 (or age 75 for those born after December 31, 1959, beginning in 2033), under SECURE Act 2.0 rules — the same thresholds as traditional IRAs.

In addition to the standard IRA rules, SIMPLE plans impose a special two-year restriction on distributions. Participants who withdraw funds during their first two years of participation in the SIMPLE plan face a 25% early withdrawal penalty tax — in addition to ordinary income taxes.

This elevated 25% penalty replaces the standard 10% penalty during the two-year window. After the two-year period has elapsed, the penalty reverts to the standard 10% for any premature distribution from the SIMPLE account.

The 25% penalty does not apply if the withdrawal during the two-year period is made:

• after age 59½,
• due to death or disability, or
• under any of the other standard exceptions to the premature distribution penalty that apply to IRAs.

The two-year restriction also affects rollovers and transfers from a SIMPLE IRA:

These limitations apply to both indirect (60-day) rollovers and direct trustee-to-trustee transfers. The rollover and transfer rules must be fully disclosed in the summary document that the trustee provides to the employee.

• Within 2 years: SIMPLE IRA → SIMPLE IRA only (tax-free). Any other transfer triggers the 25% penalty.
• After 2 years: SIMPLE IRA → traditional IRA (tax-free) or another SIMPLE IRA (tax-free).
• Never: SIMPLE IRA → 401(k), 403(b), or other qualified plan.

Distributions from a SIMPLE 401(k) are taxed the same as distributions from a regular 401(k) plan:

• Distributions are fully taxable as ordinary income in the year received.
• Premature distributions (before age 59½) are subject to the standard 10% early withdrawal penalty, with the same exceptions that apply to regular 401(k) plans.
• The two-year restriction and 25% penalty do not apply to SIMPLE 401(k) plans — this is a SIMPLE IRA-only rule.

As with any 401(k) plan, a SIMPLE 401(k) participant may withdraw funds due to immediate and heavy financial need — a hardship distribution. Under standard 401(k) hardship rules:

• The distribution must be necessary to satisfy the immediate and heavy financial need.
• A participant who takes a hardship distribution may not make elective deferrals to the SIMPLE 401(k) plan (or any other qualified plan) for the next six months following the distribution (updated from the source’s 12-month period — the Tax Cuts and Jobs Act of 2017 reduced this to 6 months).

SIMPLE 401(k) participants may borrow from their account. The standard 401(k) loan limits apply:

• Maximum loan: the lesser of $50,000 or 50% of the participant’s vested account balance.
• Loans must be repaid in substantially level payments over not more than 5 years (longer for principal residence loans).

The rollover rules for SIMPLE 401(k) plans are significantly more liberal than for SIMPLE IRAs:

• Distributions from a SIMPLE 401(k) may be rolled over tax-free to another qualified plan (401(k), 403(b), governmental 457(b)) or an IRA (including a SIMPLE IRA) within the standard 60-day rollover window.
• The two-year waiting period does not apply.
• The 25% early withdrawal penalty does not apply.
• The standard once-per-year IRA rollover limitation applies to indirect rollovers.