Employer-sponsored IRAs, such as simplified employer pension IRAs and savings incentive match plans for employee IRAs, don't restrict distributions from the plans as 401(k) plans do. However, the taxes and penalties on cashing out an employer IRA can be harsh, so you should consider a rollover if you don't need the funds immediately.
Requirements for Qualified Distributions
Just because you’ve left your old job doesn’t mean you can take qualified distributions. To take a qualified distribution from a SEP IRA or a SIMPLE IRA, you have to be at least 59 1/2 years old. When you take a qualified distribution, you still have to pay income taxes, because the money in the employer IRA wasn’t taxable in the year you made the contribution. It’s taxed at your marginal tax rate, which means the more other taxable income you have, the higher your tax rate on the cash out.
If you take a nonqualified distribution, such as cashing out in your 20s or 30s, you have to pay the regular income taxes on the distribution plus an additional 10 percent tax. For example, if you fall in the 28 percent tax bracket, you’d pay a total of 38 percent of your distribution to Uncle Sam. With SIMPLE IRAs, the penalties can be even harsher. If you cash out within two years of starting the SIMPLE IRA, the penalty increases to 25 percent. For example, if you fall in the 28 percent tax bracket and cash out your SIMPLE IRA within two years, you’d be paying 53 percent of the distribution in federal taxes and penalties -- and that doesn't include any state or local taxes.
The same early withdrawal penalty exceptions apply to employer IRAs as traditional IRAs. These exceptions get you out of paying the additional tax, but not out of the regular income taxes. Examples of exceptions include up to $10,000 for your first home, higher education expenses or if you suffer a permanent disability. You can also avoid the penalties if you have medical expenses that would be deductible if you itemized your deductions, even if you didn’t itemize.
If you don’t want to pay the taxes and penalties of cashing out, but can’t bear the thought of leaving the money in your old employer’s IRA any longer, consider a rollover. With a rollover, you move the money to another qualified retirement account, such as a traditional IRA. This way, you don’t have to pay the taxes and penalties because the money isn’t permanently distributed. In addition, all the money continues to grow without being taxed as long as it stays in the new retirement account. However, you can't roll over a SIMPLE IRA in the first two years it's open.
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