Simple IRA Withdrawals

Submitted by Kendra Johnson on Wed, 2023-06-14 18:31

What happens if the company holding funds in a SIMPLE IRA does not withhold the 25% penalty for withdrawing money before the 2-year period happens?



Submitted by Alan - IRA critic on Wed, 2023-06-14 19:40

  • That would increase the chance of the SIMPLE owner incurring an underpayment penalty, since the distribution will be taxed at the ordinary income rate plus 25%. The IRA default withholding rate is 10%, but the SIMPLE owner could decline withholding entirely if they chose to.
  • With respect to the SIMPLE IRA custodian, since a SIMPLE IRA distribution is not a “designated distribution”, there is no liability incurred by the custodian for withholding errors.


Submitted by David Mertz on Wed, 2023-06-14 21:16

As with any traditional IRA distribution, the IRA custodian is required to withhold 10% by default unless the recipient requests that 0% or more than 10% be withheld for federal taxes.  It’s not the IRA custodian’s responsibility to withhold more than 10% when there is no withholding instruction from the recipient.  It’s the responsibility of the recipient to make sure that taxes necessary to avoid an underpayment penalty are paid timely.



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