The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Arizona is representative of a common scenario involving savings incentive match plans for employees' (SIMPLE) IRA plans. The advisor asked:
If my client, who is age 63, and just received her first contribution to a SIMPLE IRA, immediately withdraws the contribution, is she subject to the 25 percent early withdrawal penalty?
Highlights of Recommendations
- In this case, no, she would not be subject to an early withdrawal penalty because her age affords her an exception.
- Generally, if a SIMPLE IRA plan participant receives a distribution within the first two years of when the initial contribution to the SIMPLE IRA is made, a 25% early withdrawal penalty pursuant to Internal Revenue Code Section 72(t) is applicable, unless the individual is age 59 1/2 or older, or meets another early withdrawal penalty exception. (See IRS Notice 98-4, Q&A I-2 for details.)
- The two-year period begins on the day the first contribution is deposited to the SIMPLE IRA.
- If an individual receives a distribution after the two-year period elapses, he or she may still be subject to a 10% early withdrawal penalty if he or she is under age 59 1/2 and does not have an early withdrawal penalty exception.
- Exceptions to the early withdrawal penalty tax for IRA withdrawals (including SIMPLE IRA) distributions include: (1) attainment of age 59-1/2; (2) unreimbursed medical expenses representing more than 7.5% of adjusted gross income; (3) distributions to unemployed individuals receiving unemployment payments for at least 12 weeks to cover health insurance premiums; (4) disability (within the meaning under Code Section 72(m)(7)); (5) death; (6) substantially equal periodic payments for life or life expectancy; (7) the cost of unreimbursed qualified higher education expenses; (8) the cost of buying, building or rebuilding a first home (lifetime limit of $10,000); (9) IRS levy on the IRA; (10) qualified reservist distribution for an individual who is called to active duty for longer than 179 days after Sept. 11, 2001; (11) conversion to a Roth IRA; and (12) federally qualifying disaster-related distributions.
Conclusion
If an individual is over age 591/2, and takes a distribution from a SIMPLE IRA, there will be no early withdrawal penalty. This is true even if the distribution occurs within two years of the individual receiving the first contribution to his or her SIMPLE IRA.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
