Individual retirement accounts (IRAs) help you to save for retirement. As long as you keep the money in the IRA, you incur no income tax liability. When you take distributions from a traditional IRA, you must report that money as taxable income, which adds to your income taxes due. In addition, if you are not 59 1/2, you owe an extra income tax penalty, further increasing your tax liability. When taking a withdrawal before age 59 1/2, you avoid the early withdrawal penalty if you qualify for an exception, such as suffering a permanent disability or paying for post-secondary education expenses.

## Traditional IRA Disbursements

Add the value of any nondeductible contributions made to the traditional IRA to find your total nondeductible contributions. If you did not make nondeductible contributions, skip to Step 5 because your entire disbursement is taxable.

Divide your nondeductible contributions by the total value of the account to find the portion of nondeductible contributions. For example, if you have $10,000 in nondeductible contributions and your traditional IRA's value equals $50,000, divide $10,000 by $50,000 to find your IRA has 20 percent nondeductible contributions.

Subtract the percentage of nondeductible contributions from 100 to find the percentage of taxable money in your traditional IRA. In this example, subtract 20 from 100 to find that 80 percent of your distribution is taxable.

Multiply the percentage of taxable distributions by your total distribution to find the portion of your disbursement that is taxable. In this example, if your distribution equals $12,500, multiply $12,500 by 80 percent to get $10,000 in taxable distributions.

Estimate your marginal income tax rate based on your taxable income and the IRS income tax brackets. The tax brackets differ each year and depend on your tax filing status. The IRS publishes the tax rate schedules in IRS Publication 17 each year. For example, if in 2010 you were married filing jointly and had an adjusted gross income of $90,000, you fall in the 25 percent tax bracket.

Divide the marginal tax rate by 100 to convert it to a decimal. In this example, divide 25 by 100 to get 0.25.

Multiply the marginal tax rate by the taxable amount of your IRA distribution. For example, if you took a $10,000 IRA distribution, multiply $10,000 by 0.25 to find that your income tax on the IRA distribution will be $2,500.

Multiply your IRA distribution by 10 percent if taking a nonqualified distribution without an exception. The 10 percent early withdrawal penalty does not vary depending on your income and adds to your taxes due. It does not replace the standard income tax. In this example, if your $10,000 distribution was nonqualified, multiply $10,000 by 0.1 to find you also owe a penalty of $1,000.

## Roth IRA Disbursements

Proceed to Step 2 only if your Roth IRA is less than five tax years old and you are under 59 1/2 years old. If you are 59 1/2 years old and you opened your Roth IRA at least five tax years ago, the entire distribution is tax-free and penalty-free.

Add the value of all the contributions made to the account. You can remove this amount tax-free and penalty-free. For example, if over the years you put in $30,000 to your Roth IRA, you could remove $30,000 without paying any taxes or penalties. If your Roth IRA disbursement is less than $30,000, you owe no income taxes or penalties.

Estimate your marginal income tax rate based on your taxable income and the IRS income tax brackets. The tax brackets differ each year and depend on your tax filing status. The IRS publishes the tax rate schedules in IRS Publication 17 each year. For example, if in 2010 you were married filing jointly and had an adjusted gross income of $90,000, you fall in the 25 percent tax bracket.

Divide the marginal tax rate by 100 to convert it to a decimal. In this example, divide 25 by 100 to get 0.25.

Multiply the marginal tax rate by the taxable amount of your IRA distribution. For example, if you took out $20,000 of earnings on top of all of your contributions from your Roth IRA, multiply $20,000 by 0.25 to find your income tax on the IRA distribution will be $5,000.

Multiply the taxable portion of your Roth IRA distribution by 10 percent if taking a nonqualified distribution and you do not have an exception. The 10 percent early withdrawal penalty does not vary depending on your income and adds to your taxes due. It does not replace the standard income tax. In this example, since you took out $20,000 of earnings, multiply $20,000 by 0.1 to find your penalty equals $2,000.