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SIMPLE IRA Distributions

The tax circumstances surrounding SIMPLE IRA distributions match those of a Traditional or SEP IRA. You may defer contributions from your income and hopefully pay lower taxes once you reach retirement age. However, a key distinction lies in the penalty assessed by the IRS in the event of a premature distribution.

Your SIMPLE IRA must be open at least two years before you can take a penalty-free distribution, regardless of your age. Early distributions taken within two years of your initial SIMPLE IRA contribution will carry a 25% penalty on top of the applicable taxes. The penalty drops to 10% if the account reaches two years old but you're still below the age of 59½ (as with an early distribution from a Traditional IRA).

Distribution Timeline

January 1, 2018

You just turned 56 and decide to open a new self-directed SIMPLE IRA. You also make your first contribution

January 1, 2019

You just turned 57. Any distributions will bear the 25% penalty because it's only been one year since your initial contribution.

January 1, 2020

You just turned 58. It's been two years since your first deposit, but you're still not 59½. As such, an early distribution would still cost you 10%.

July 1, 2021

You just turned 59½. Any SIMPLE IRA distributions from here on out will be taxed as income and you needn't worry about IRS penalties anymore.

Early Distribution Exemption

You may distribute from a SIMPLE IRA prior to age 59½ and avoid the 10% penalty under the following circumstances:

  • Distributed funds are used to buy, build, or rebuild your first home. Up to $10,000 may be distributed penalty-free in this instance.
  • You owe or seek reimbursement for medical expenses that equal more than 10% of your adjusted gross income (AGI). Medical expenses need only equal 7.5% of your AGI if you or your spouse were born before January 2, 1952.
  • Distributions do not exceed the cost of medical insurance while unemployed.
  • Withdrawals qualify as reservist distributions.
  • Distributions do not exceed your qualified higher education expenses.
  • You are permanently and completely disabled.
  • You hold a non-spouse Inherited IRA, from which RMDs will be due regardless of age.
  • You receive distributions as an annuity.
  • The IRS has levied your account.

Required Minimum Distribution FAQs

How do you calculate an RMD?
The base RMD calculation is your end-of-year account value from the previous calendar year (i.e. the value of your account as of December 31st) divided by a factor associated with your age. Other factors may affect the calculation as well, so please consult with your accountant or tax professional.

When is your first RMD due?
Your first RMD will come due April 1st, the calendar year after you turn 70½. For example, if you turn 70½ on January 1, 2019, you have until April 1, 2020 to take your first RMD. You would make the calculation based on your account value as of December 31, 2018. The SECURE Act made significant changes to RMD requirements for anyone turning 70½ after 12/31/2019. If you turn 70½ in 2020 or later, you won't need to start taking RMDs until after attaining age 72.

After the first one, when are RMDs due in future years?
All subsequent RMDs must be taken by December 31st every year. In our prior example, if you take your first (2018) RMD on April 1, 2020, you have until December 31, 2020 to take another distribution for 2020 (based on your account value as of December 31, 2019).

Do you have to take RMDs from every pre-tax account you hold?
You may owe RMDs from multiple accounts, but you're under no obligation to make actual withdrawals from each one. Let's say you have a SIMPLE IRA and a Traditional IRA; you calculate an RMD of $500 for the Traditional IRA and $1,000 for the SIMPLE. You could take those distributions separately, or you could take a $1,500 lump distribution from either account. As long as the cumulative required minimum is satisfied, the IRS doesn't care about which accounts produce the taxable events.

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