SIMPLE IRA Early Withdrawals: 25% Penalty in First 2 Years

Federal tax rules on retirement accounts remain unchanged in 2024 and 2025, and that steadiness matters for many immigrants and foreign workers in the United States 🇺🇸 weighing whether to tap savings early. The Internal Revenue Service still treats most withdrawals made before age 59½ as “early distributions.” Those withdrawals generally trigger a 10% additional tax on the taxable part of the payout, on top of regular income tax.

For workers with a SIMPLE IRA, the stakes are higher during the first two years of participation: early withdrawals in that window can bring a 25% penalty rather than 10%, a difference that can drain a family’s cash cushion when it is needed most.

Why the unchanged rules matter now

Tax professionals say the lack of policy change is important because many households are still facing uneven earnings and rising costs. People who moved to the United States recently or changed visa status often juggle relocation expenses, credential transfers, and long travel to visit family abroad. In those moments, a quick withdrawal from a retirement plan can feel like a lifeline — but for anyone under 59½, that lifeline often comes with a sharp tax bill.

VisaVerge.com reports that clients frequently miss the two-year twist in the SIMPLE IRA rules and are surprised when the penalty jumps to 25% after a hardship hit or a job change.

Base rule for early distributions

• Most distributions from qualified plans and IRAs before age 59½ are considered “early distributions.”
• The 10% additional tax applies to the amount you must include in income.
• If part of the payout is non-taxable (for example, a proper rollover to another qualified plan), that portion is not subject to the penalty.
• This base rule holds across Traditional, Roth (for nonqualified earnings), SEP, and SIMPLE IRAs.

SIMPLE IRA special rule:
– If you take money out within two years of first taking part in the plan, and you are under 59½, the penalty jumps to 25% on the taxable amount.
– After two years, the penalty drops back to the standard 10% until you reach 59½.

Policy status and recent IRS messaging

• Officials have not announced new exceptions or relief in 2024 or 2025.
• The IRS continues to point taxpayers to long-standing guidance in Publication 590-B on how the penalties work and when exceptions apply.
• There has been no move in Congress or by the administration to adjust the 10% additional tax or the SIMPLE IRA two-year rule.
• Required minimum distributions (RMDs) remain in place at age 73 for SIMPLE IRA owners, even if you’re still working and contributing.

The IRS has stepped up public messaging on web pages and social media to remind savers about the 25% risk inside the first two years of a SIMPLE IRA. Financial firms say they continue to process distribution requests quickly — often by check within a week or by bank transfer in a few business days. That speed is helpful in emergencies, but it can also make it easy to act before you fully consider the tax consequences.

Real-world impact and common situations

For many recent arrivals, pay can be uneven during the first year of work, and family demands abroad do not pause. Example scenarios:

• A scientist on an employment-based visa may face visa renewal fees at the same time a parent back home needs urgent medical care.
• If that scientist taps a SIMPLE IRA opened last year, the two-year window can turn a tight month into a painful year-end tax bill.

Advisers often walk clients through alternatives that may reduce the penalty, such as:
1. Waiting until the day after the two-year mark.
2. Using other savings first.
3. Checking whether an IRS exception applies.

Exceptions, timing, and the two-year trap

• The early distribution penalty does not apply once you reach age 59½.
• Several exceptions can remove or reduce the penalty before that age. Common examples:
  • Disability
  • Unreimbursed medical bills above a set share of your income
  • Certain higher education costs
  • First-time home purchase (for IRAs, up to $10,000)
  • Some health insurance costs while unemployed
  • Qualified reservist distributions
  • Payments to a beneficiary after the account owner’s death

Each exception has strict definitions. If you claim one, you may still owe income tax on the distribution itself, but not the extra penalty.

SIMPLE IRA specifics:
– The two-year clock starts on the date of your first employer contribution to your account — not when you signed the enrollment form.
– Withdrawing, transferring, or rolling over money out of a SIMPLE IRA within that first two-year period (if under 59½) increases the penalty to 25%, unless you roll it to another SIMPLE IRA.
– Rolling to a Traditional IRA or other plan during that window is treated as a taxable distribution and can trigger the 25% penalty.
– After two years, moving money to other IRA types is allowed without that special penalty, though standard rules still apply.

Example of the cost difference:
– For a $20,000 taxable payout:
– 10% penalty = $2,000
– 25% penalty = $5,000
– Add income tax, and the net retained cash may be far less than expected.

Questions to ask before withdrawing

If you are under 59½, pause and confirm:
– Does an exception apply to all or part of this withdrawal?
– Has my SIMPLE IRA passed the two-year mark from the first employer contribution?
– Is a proper rollover possible to avoid a taxable event?
– Can I delay until age 59½ or the end of the two-year window?

Reporting and forms

If you take an early distribution and believe an exception applies, you normally report the situation on Form 5329.

• See About Form 5329: https://www.irs.gov/forms-pubs/about-form-5329
  This is the form used to claim a penalty exception or to calculate the 10% additional tax (or the 25% rate that applies to SIMPLE IRA early distributions within the two-year period).

If you do not qualify for an exception, you must report and pay the penalty when you file your tax return.

For authoritative guidance, consult:
– IRS Publication 590-B: https://www.irs.gov/publications/p590b
The publication explains what counts as income, what exceptions exist, and how the two-year rule operates for SIMPLE IRA owners.

Roth IRAs and ordering rules

• Qualified Roth IRA distributions — generally after five years and once you reach age 59½ — are not taxable and do not face the penalty.
• Nonqualified Roth earnings pulled early can be taxable and can face the added tax unless an exception applies.
• Recent arrivals sometimes mix Roth contributions and earnings when they withdraw, expecting all amounts to be tax-free. The ordering rules can be complex, so check Roth rules before moving cash.

Recordkeeping and plan administration

• Plan administrators and payroll teams can help you find the date of your first SIMPLE IRA employer contribution — the anchor for the two-year rule.
• If you switched jobs, you may need records from both employers to track the start date.
• Keep statements, enrollment emails, and confirmation letters organized so you can count the days with confidence.
• If you have multiple SIMPLE IRAs, confirm the start date for each account; the two-year clock follows the start date tied to each plan.

Practical advice and alternatives

Even without new laws, the practical effect is clear: early withdrawals remain costly for anyone under 59½, and the SIMPLE IRA’s first two years are especially harsh. Consider these alternatives to avoid or reduce the penalty:

• Ask the plan if it allows a rollover to another SIMPLE IRA (which avoids the 25% hit during the two-year window).
• Consider a partial withdrawal that fits within an IRS exception.
• Explore a payment plan with the service provider (e.g., medical provider, immigration lawyer).
• Temporarily pause retirement contributions and redirect cash flow, then resume saving once the emergency passes.
• Build a worksheet showing:
  • Gross amount
  • Taxable share
  • Estimated income tax
  • 10% or 25% penalty
• If your plan allows, ask for tax withholding that matches your estimate.

Important: The first 24 months in a SIMPLE IRA are a red zone. If you are under 59½, a withdrawal in that window can trigger a 25% hit. After two years, the rate falls to 10% until you reach 59½, when the early distribution penalty no longer applies.

Required minimum distributions and other penalties

• SIMPLE IRA owners must start RMDs at age 73. If you keep working past that age, the RMD still applies.
• Failing to take an RMD can bring its own excise tax; the IRS has separate rules for fixing missed RMDs.
• The RMD obligation is separate from early distribution penalties, but both can affect long-term savings.

Bottom line

Because the rules have not changed in 2024 or 2025, prior guidance remains reliable. Take a breath before you tap retirement funds, confirm your two-year clock, check the exceptions, and, if needed, use Form 5329 to report your situation correctly.