What is the penalty for a SIMPLE withdrawal made in the first two years?

The penalty for a SIMPLE (Savings Incentive Match Plan for Employees) IRA withdrawal made within the first two years of participation is indeed 25%. This specific penalty is imposed to discourage early withdrawals and maintain the purpose of the retirement account, which is to encourage long-term savings for retirement.

During the first two years of participation in a SIMPLE IRA, if an individual withdraws funds, they will face this increased penalty in addition to potential regular income taxes on the amount withdrawn. After the two-year period, the penalty for early withdrawal reverts to the standard 10% that applies to most other retirement accounts, provided the individual is under age 59½.

This structure is designed to provide an incentive to keep the funds invested for a longer term, benefiting the account holder's future retirement savings.