How Much Tax Do I Have to Pay on My IRA Withdrawal?
Traditional IRA withdrawals taken before age 59 1/2 are generally subject to income taxes and a 10% penalty, with exceptions including disability, buying your first home and incurring high medical costs.
Taxes and penalties may be avoided by “rolling over” the money within 60 days into either your existing IRA or another one of them.
Taxes
No matter the purpose, withdrawing from an IRA requires understanding the taxes due. Consulting with a trusted tax professional will allow you to plan for withdrawals and complete all applicable forms.
Traditional IRA withdrawals are considered taxable income even if your contributions were nondeductible, including distributions from traditional, rollover and SEP/SIMPLE IRAs as well as former employers IRAs that you converted to traditional.
Only withdrawals used to purchase a first home or health insurance are subject to income taxes and a 10% penalty on earnings – the rest is considered return of contributions. Therefore, withdrawals such as these should be used for unexpected expenses that cannot be covered through other sources, as you can withdraw up to $10,000 penalty-free if an emergency arises.
Penalties
Unless an exception applies, withdrawing money from a traditional or Roth IRA before age 59 1/2 will incur income taxes and a 10% penalty, as the IRS considers these withdrawals income even if your contributions weren’t tax deductible.
An experienced tax professional can assist in avoiding penalties by understanding the rules. An advisor may also help plan ahead for expenses that will avoid early withdrawal penalties, such as unreimbursed medical expenses that exceed 7.5% of adjusted gross income or first-time home purchases or medical insurance premium costs for self-employed.
Avoid early withdrawal penalties by creating a systematic withdrawal plan known as substantially equal periodic payment (SEPP). For more information on this topic, visit IRS.gov.
Exceptions
the IRS typically imposes a 10% early-withdrawal penalty tax on withdrawals made from retirement plans or traditional and Roth IRAs made before age 59 1/2, except under certain exceptions. These include paying unreimbursed medical expenses exceeding 7.5% of adjusted gross income; purchasing your first home; withdrawing amounts for qualified higher education costs for yourself, your spouse or children; investing in highly refined gold bullion that’s not held as collectibles; investing in precious metals like bullion as long as it’s held for investment purposes; plus Congress could add even more retirement-related exceptions to its legislative package of $1.7 trillion!
Traditional, Rollover and SIMPLE IRAs differ from Roth IRAs in that they are funded with pre-tax dollars; therefore any withdrawal you make is taxed as ordinary income and subject to one of 11 exceptions for an additional 10% penalty tax.
Required minimum distributions
Once you reach age 72, the IRS mandates that you withdraw an annual minimum from traditional IRAs and employer-sponsored retirement accounts such as 401(k) and 403(b) plans; these withdrawals are known as required minimum distributions (RMDs). Your RMD depends on your life expectancy and account balance at year-end; to calculate it use either their Joint Life and Last Survivor Expectancy Worksheet (if your spouse is more than 10 years younger) or Uniform Lifetime Table found in Appendix B of IRS Publication 590 respectively.
RMD rules apply to both individual retirement accounts such as an IRA or retirement plan account – including SEP/SIMPLE IRAs, 401(k), and 403(b). You may start taking RMDs when you retire; otherwise you can delay starting them until later years. When inheriting an IRA you may opt to roll it over into an inherited IRA in order to avoid taking RMDs; Roth IRAs do not fall under these requirements.
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