How to Determine Taxes on an IRA Distribution

by Michael Keenan ; Updated July 27, 2017
All IRA distributions must be reported on your tax return, even if you don't owe any taxes.

Individual retirement accounts offer tax advantages to encourage you to save for your golden years. No matter what type of IRA you use, you won't pay taxes while the money grows in the account. Whether you're going to owe the Internal Revenue Service taxes and penalties when you take money out depends on your age and the type of IRA you're taking a distribution from.

Traditional IRA Distributions

Traditional IRA withdrawals always count as taxable income unless you've made nondeductible contributions. Nondeductible contributions refer to money that you've put into the account without receiving a tax deduction. If you made nondeductible contributions, your distribution is divided between the nondeductible contributions, which come out tax-free, and the remainder of the account, which is taxed, based on the makeup of your account. For example, say 20 percent of your account is nondeductible contributions and 80 percent is deductible contributions and earnings. If you take out $1,000, $200 comes out tax-free and $800 is taxable.

Roth IRA Distributions

Roth IRA withdrawals, on the other hand, are more likely to come out tax-free. Regardless of your age, you can withdraw contributions you've made without paying any taxes or early withdrawal penalties. However, once you've exhausted the contributions and start withdrawing earnings, those distributions count as taxable income unless you meet the criteria to take a qualified distribution. First, you must have had the account open for five years. Second, you must be either 59 1/2 years old, permanently disabled or taking out up to $10,000 for a first-time home purchase.

Tax Brackets

The IRS treats the taxable portion of your IRA distribution as ordinary income, which means it's taxed at your marginal tax rate. The more income you have, the higher the tax rate applied to your IRA distributions. For example, if $5,000 of your distribution is taxable and you fall in the 15 percent tax bracket, you'll owe $750 in taxes. If you're in the 33 percent bracket, you'll owe $1,650 on that same distribution amount.

Early Withdrawal Penalties

If you take a taxable distribution before turning 59 1/2, the IRS imposes an extra 10 percent penalty on the taxable portion of the distribution. For example, if you take out a $10,000 taxable distribution from your IRA at 40, not only will you owe income taxes based on your marginal rate, you'll also owe a $1,000 penalty. However, you can avoid this penalty in a few, limited circumstances. You can take out as much as you want without penalty if you inherited the IRA, if you're permanently disabled, or if the IRS is levying your IRA. In addition, amounts equal to your higher education expenses, medical expenses exceeding 10 percent of your adjusted gross income -- 7.5 percent if you're over 65 -- or up to $10,000 to buy a first home.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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