SIMPLE IRA Withdrawal Rules: Taxes, the 25% Penalty, and Every Exception (2026)

You may withdraw funds from a SIMPLE IRA at any time for any reason. Since it is a type of IRA, you will never require your employer's approval. Pre-tax withdrawals are taxed as ordinary income. If you are under age 59½, there also will usually be a penalty in addition to the tax: 25% during your first two (2) years of participation in the plan, and 10% thereafter. The two (2)-year clock begins with the date on which you make your first contribution to the Plan. This is by far the most critical piece of information before withdrawing funds.

Can you withdraw from a SIMPLE IRA anytime?

A SIMPLE IRA is not a 401(k). An employer-sponsored 401(k) uses an employer-controlled trust, and this is what gives rise to 401(k) restrictions such as those applying during service and when distributions are made for hardship reasons. By contrast, a SIMPLE IRA is an individual retirement account set up in the name of each employee by a custodian using funds contributed via payroll. Once that contribution has been deposited into the employee's SIMPLE account, that money belongs solely to the employee, who owns it outright with no vesting requirements on any contributions provided by employers, as addressed in SIMPLE IRA vs. 401(k). At any point after funding occurs, employees can request a withdrawal directly from their custodian. Therefore, there is nothing standing between an employee and access to all of his/her monies except tax implications and possible penalties.

How are SIMPLE IRA withdrawals taxed?

You can withdraw your pre-tax SIMPLE IRA contributions (including earnings) at any time. It is treated similarly to a traditional IRA in that you will be required to pay taxes on the amount of money you withdraw based upon your current ordinary income tax rate. Additionally, a traditional IRA carries the standard 10% early withdrawal penalty before age 59½ under IRS Publication 590-B.^[1] There is no capital-gains rate, and unlike with a Roth IRA, there is no ability to withdraw only your contributions without paying ordinary income taxes or penalties.

Roth SIMPLE contributions are allowed, as of SECURE 2.0, and are governed by the same rules that apply to Roth accounts. Qualified distributions from Roth SIMPLE IRA may be tax-free.

How does the SIMPLE IRA 2-year rule work?

SIMPLE IRAs have an additional catch. If you are under 59½ and withdraw from the SIMPLE IRA before 2 years after your participation began, the IRS will charge a 25% withdrawal penalty instead of its usual 10% withdrawal penalty.^[2] The increased rate is codified in the Internal Revenue Code at 26 U.S.C. 72(t).^[3]

Two errors people make:

• The clock starts on your first contribution date: not your hire date, not the plan's start date, not the day you sign the paperwork.
• The 2-year rule also poisons rollovers: the "two year rule" penalizes rollover of SIMPLE IRA assets into plans that are not SIMPLE IRAs during the first 2 years after your first contribution. Any such transfer made prior to the expiration of this time frame will be treated as a distribution and thus subject to both income tax as well as a 25% penalty. The mechanics of these penalties are discussed in our SIMPLE IRA rollover rules guide.

Which exceptions waive the penalty?

When a recognized exception applies, the penalty (whether 10% or 25%) completely disappears. Publication 590-B lists every one of them in total detail, and the major ones are:^[1]

• Age 59½ or older: no penalties whatsoever. It is treated as ordinary income tax.
• Death or disability: distributions to your beneficiaries, or while totally and permanently disabled.
• Medical costs: unreimbursed expenses above the IRS threshold, and health insurance premiums while unemployed.
• Higher education and first home: qualified education expenses for you and your family, and up to the lifetime IRA limit toward a first-time home purchase.
• SECURE 2.0 emergency distribution: One Small Withdrawal of Funds Each Year for Unforeseen Emergency Expenses Which May Be Repaid.
• Other standard IRA exceptions: including substantially equal periodic payments, IRS levy, a qualified birth or adoption distribution, and certain disaster distributions.

Can you take a loan from a SIMPLE IRA?

401(k) plans can allow for lending money to participants. SIMPLE IRAs do not. As an IRA, there are IRA rules that specifically state you cannot borrow from your own IRA account or use it as collateral for a loan and in doing so could disqualify the entire account with tax ramifications of being taxed on the total value of the account all at one time. When asked by an employee if they can borrow money out of their SIMPLE IRA and repay it, the answer is "no". The closest option allowed under federal law is the 60-day rollover. This option has its own risks and limitations (a rollover may be done only once every 12 months).

When do required minimum distributions start?

Pre-tax SIMPLE IRA balances are subject to required minimum distributions (RMDs) once you reach the RMD age, just like a traditional IRA, and missing one triggers an IRS excise tax on the shortfall. Roth SIMPLE balances are exempt from lifetime RMDs under SECURE 2.0. Unlike some 401(k)s, IRAs have no "still employed" exception, so working past RMD age does not delay it.

What do employers need to know about withdrawals?

You can expect employees to inquire regarding withdrawing from their retirement plan. However, the common response is for them to contact the custodian of their retirement plan. Under a SIMPLE IRA, the employer facilitates payroll contributions into the employee's individual retirement account (the "Account"), makes all deposits on behalf of those Accounts within seven (7) business days after each payroll period, makes the required employer contribution under a SIMPLE IRA as well as sends an annual notice to participants. However, the Account is held by the custodian in each participant's name individually and separately. As such, you cannot approve, deny, or delay a withdrawal request. Furthermore, you have no fiduciary role in the decision. In general terms, what you should do is ensure that participants understand the 2-year rule before they become part of a SIMPLE-IRA plan, because they would be assessed a 25% penalty if they withdraw monies from their Account during year one. IRAPilot provides this explanation in its enrollment materials generated for employers, and your additional obligations are addressed in detail under SIMPLE IRA Rules for Employers.

The Bottom Line

A SIMPLE IRA belongs to the employee, therefore an employee can withdraw money at all times. However, pre-tax money comes out as ordinary income and a penalty applies under 59½. The penalties for early withdrawal are as follows: 25% for the first 2 years of participating in the plan, then 10%, and the clock starts on the date of your very first contribution to the plan. Exceptions such as disability or a first home purchase waive the penalty. However, they do not eliminate the tax liability on this type of distribution. Therefore, consider timing your withdrawal prior to tapping into this account.

This guide is educational and summarizes IRS rules for SIMPLE IRA plans. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Talk to your tax advisor about your business's circumstances.