Distributions from a SIMPLE IRA are generally taxed like distributions from a traditional, deductible IRA. Distributions are fully taxable when the participant withdraws funds from the account, premature distributions are subject to a 10% penalty tax, minimum distributions must begin no later than age 70½., etc.
In addition to these general IRA rules, SIMPLE IRAs impose a special, two-year restriction on distributions. [§ These restrictions do not apply to SIMPLE 401ks]. Participants who withdraw funds during their first two years of participation face a 25% penalty tax on premature distributions. This is in addition to the income taxes owed on the distribution. The 25% tax does not apply to withdrawals made after age 59½, due to death or disability, or any of the other exceptions for premature distributions. After the first two years, the penalty tax reverts to the usual 10% for premature distributions from IRAs.
During the first two years of an employee’s participation, a distribution may be rolled over only from one SIMPLE IRA to another SIMPLE IRA. During the first two years, rollovers to other types of IRAs are subject to the 25% penalty. After the two-year period, a participant may roll a distribution over from a SIMPLE account to a “regular” IRA without penalty. The penalty also applies to direct trustee-to-trustee transfers to non-SIMPLE IRAs in the first two years.
Assets held in a SIMPLE IRA may 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 the procedures for rolling over distributions from the SIMPLE account in the plan summary provided to the employee.