Simple IRA Withdrawl Comes With Heavy Penalties

People who are considering making a simple IRA withdrawl should speak with a financial adviser to determine the associated penalties and taxes. This information will help determine if making the withdrawal is worth it.

During these tough economic times, people may want to withdraw money from the simple IRA and/or other retirement investment vehicles in order to fill financial gaps.

If it is necessary to make a simple IRA withdrawl at this time, doing will greatly reduce the amount that you will receive and also decrease the amount of money available to you once you retire.

Simple IRA Withdrawl - Elective or Forced

There is a difference between an elective withdrawal and a forced withdrawal from a simple IRA. The taxes and penalties are determined by your age at the time of the withdrawal.

You are not able to transfer or roll over the assets accumulated in a simple IRA during the first two years after the account is established. This rule does not apply if the transfer is between two simple IRA plans.

At the end of the two year period, the assets accumulated in the simple IRA can be moved into another eligible retirement plan as a transfer, rollover or Roth conversion.

This is important to mention because any distribution within the two years is subject to a 25% penalty if you are not 59 ½ years old. There are exceptions where the 25% penalty fee is waived.

People who use the distribution to pay for medical expenses that is not reimbursed by their insurance company are not penalized as heavily.

Any amount of the simple IRA withdrawl which exceeds 7.5% of their adjusted gross income (AGI) for that year is not subject to an early distribution penalty.

There are also conditions in which a person can avoid the penalty associated with an early simple IRA withdrawl.

If the money is needed in order to pay for medical insurance for themselves, a spouse and dependents, a penalty-free distribution can be received as long as certain conditions are met.

The person must be unemployed and has received unemployment compensation for at least 12 consecutive weeks. The simple IRA withdrawl distribution must be made either during the same year or the following year that unemployment payments are received. And, the distributions cannot be made until he or she has been re-employed for 60 days.

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