Working with a client who made a non-deductible contribution in 2016 to a traditional IRA. Their intention was to execute a backdoor Roth conversion, but after making the contribution they ultimately decided to not go through with it due to the pro-rata rule. As of today, the client has most of their assets in Simple IRA and Rollover IRAs, but still has a relatively small balance in the non-deductible IRA.

My question is regarding the mechanics of withdrawing the balance from the traditional IRA, which has been left in cash since 2016. If we simply take a withdrawal of the IRA balance, I understand we will run into the pro-rata rule and take a tax hit on the majority of the withdrawal. The client is under age 59 1/2, so I believe an early withdrawal penalty also applies to the taxable portion of the withdrawal. Is this correct?

Another option is to go through with the backdoor conversion, paying income taxes on the majority of the conversion amount. No early withdrawal penalties apply in this case?

Client is self-employed and has the Simple IRA set up for their business. I’ve thought about establishing a 401k to accept IRA rollovers into the plan, but probably will not be the first option in this case.

Given the above assumptions are true, it seems to make more sense to go ahead with the backdoor conversion to avoid the early withdrawal penalty, rather than a withdrawal of funds. Possibly converting a portion of the traditional IRA each year over a few years. Any insight would be much appreciated.