A SIMPLE IRA is a type of retirement plan that is popular among small businesses and the self-employed. Like most other retirement accounts, there are special rules governing when you can withdraw the money. Here's what you need to know.
What is a SIMPLE IRA?
A SIMPLE IRA plan is available to any small business with 100 or fewer employees, and as the name implies, is relatively easy to establish and maintain. Employees may choose to contribute to their accounts, and the employer has two options. They can either:
- Match employee contributions up to 3% of compensation, or
- Contribute 2% of compensation for every eligible employee.
Employees are always 100% vested in their accounts, and their contributions are limited to $12,500 in 2016, with an additional $3,000 "catch up" contribution allowed for account holders over 50. Just like most other tax-deferred retirement accounts, employees are required to begin taking required minimum distributions at age 70 1/2.
If you'd like more information about SIMPLE IRAs, check out this in-depth look at this type of account.
When are you allowed to withdraw from a SIMPLE IRA?
Technically, you can withdraw the funds in your SIMPLE IRA whenever you want to. However, if you make an unqualified withdrawal, you'll face a 10% early withdrawal penalty from the IRS. If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.
Qualified reasons for withdrawing from a SIMPLE IRA include the following:
- You're over 59 1/2 years old. This is considered "retirement age" for the purpose of most types of retirement accounts.
- You die or become totally and permanently disabled.
- The withdrawal is used to pay qualifying higher-education expenses.
- You agree to take withdrawals in a series of "substantially equal payments" over your remaining life expectancy.
- The withdrawal is $10,000 or less and is used toward a first-time home purchase for you or a relative.
- The withdrawal is used to pay an IRS levy.
- The withdrawal is used to pay large unreimbursed medical expenses, or to pay health insurance premiums while you're unemployed.
- You're a qualified military reservist called to active duty.
It's also important to mention that any money you withdraw from your SIMPLE IRA, regardless of whether it's a qualified withdrawal or not, will be included in your taxable income for the year. So before you cash out your entire account, consider that doing so may put you into a higher tax bracket.
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