Increased Penalty for SIMPLE Plans
The premature withdrawal penalty also applies to SIMPLE IRAs. If a distribution occurs during the 2-year period following the date on which the individual first participated in his or her employer's SIMPLE plan, the additional tax on premature distributions is increased from 10% to 25%.

Also, if a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the two-year rule, and is otherwise a premature distribution, the additional tax imposed because of the premature distribution is increased from 10% to 25% of the amount distributed.

Exceptions to the Premature Distribution Penalty Tax

The are exceptions to the premature distribution penalty tax for distributions made from traditional IRAs;

• Unremembered medical expenses
  Even if you are under age 59 1/2, you do not have to pay the 10% tax on amounts you withdraw that are not more than:

  The amount you paid for unremembered medical expenses during the year of the withdrawal, minus 7.5% of your adjusted gross income for the year of the withdrawal.

  You can only take into account unremembered medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A, Form 1040. You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.

  Medical insurance
  Even if you are under age 59 1/2, you may not have to pay the 10% tax on amounts you withdraw from your traditional IRA during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all four of the following conditions apply.

  • You lost your job
  • You received unemployment compensation paid under any federal or state law for 12 consecutive weeks.
  • You make the withdrawals during either the year you received the unemployment compensation or the following year.
  • You make the withdrawals no later than 60 days after you have been reemployed.

• Disability
  If you become disabled before you reach age 59 1/2, any amounts you withdraw from your traditional IRA because of your disability are not subject to the 10% additional tax. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long continued and indefinite duration.

  Continued - Part II