How Much Tax Do I Pay on an IRA Withdrawal?
How much you owe in taxes upon withdrawing an IRA depends on whether or not there have been nondeductible contributions and how the taxable amount is calculated. To calculate it, divide the sum of nondeductible contributions by total sum of all IRAs held at time of distribution to create a fraction.
Taxes on IRA Withdrawals
IRA withdrawals are subject to income taxes like any other income source; the exact tax liability depends on how your IRA was set up and managed. Additionally, the IRS requires people over age 72 to withdraw at least an annual minimum from their retirement accounts known as required minimum distributions (RMDs), calculated by dividing your account(s)’ balance at the end of last tax year by your life expectancy which can be found through tables published by them.
RMDs are also required of nonspouse beneficiaries who inherit an IRA from their deceased spouse’s estate, and if funds are withdrawn early the IRS imposes a 10% penalty.
Fidelity will withhold federal taxes from your IRA withdrawals by default; you can opt-in to having different amounts withheld during withdrawal requests made online. For more details visit our Pending Transfers page.
Taxes on Roth IRA Withdrawals
Like traditional IRAs, Roth IRA withdrawals require income taxes to be paid on them and usually incur a 10 percent penalty if taken before age 59 1/2; this rule does not apply in cases such as disability, buying your first home or having significant medical costs and similar situations.
Once you turn 59 1/2, your Roth IRA contributions can be withdrawn at any time without incurring taxes or penalties; however, any earnings withdrawn prior to that point must pay taxes according to either the five-year rule or qualification requirements of your account.
Typically, early withdrawal will incur income taxes and a 10% penalty; however, these penalties may be waived under one of eight exceptions to this rule.
Taxes on Traditional IRA Withdrawals
IRAs enable you to make contributions tax-deferred; however, when withdrawing this money it must be taxed unless an exception applies.
If you make withdrawals from a Traditional, Rollover, SEP or SIMPLE IRA before age 59 1/2, the IRS charges an early distribution penalty equal to 10% on the taxable portion of those withdrawals. This charge must also be included when filing your tax return.
Traditional IRA owners must begin taking minimum distributions as of a certain age, which is known as their required Beginning Date (RBD). You can calculate this date by calculating a fraction whereby the numerator represents cumulative nondeductible contributions and denominator represents your account balances at year’s end divided by life expectancy according to IRS tables, then multiplying that figure by your tax bracket to calculate an estimate of how much tax will be due on it.
Taxes on Early Withdrawals
Assuming you don’t qualify for an exception, the IRS will tax any withdrawals from traditional IRAs or employer-sponsored retirement plans before age 59 1/2. They’ll charge a 10% penalty and then regular income tax according to your tax bracket.
There are certain exceptions that allow for penalty-free withdrawals from an IRA, including withdrawals made for first-time home purchases, education expenses for yourself or your children, emergency medical bills or military service.
One exception allows you to change your method for determining required minimum distribution (RMD) once without incurring penalties in subsequent years. This change takes immediate effect.
An early withdrawal can cost you years of tax-deferred growth, which could limit how much money is available when it’s time for retirement. To understand more of the tax consequences of early IRA withdrawals, connect with a financial advisor through SmartAsset’s free advisor matching tool – it will find local professionals.
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