Does an Early IRA Withdrawal Affect or Count for Income Tax Purposes?

by Alia Nikolakopulos

Every withdrawal you make from an individual retirement account must be reported on your income tax return. However, not all early withdrawals are actually taxable. Whether your withdrawal affects the outcome of your taxes depends on the type of IRA you take the money out of, whether you roll the funds over into another retirement account and whether you're eligible to have any early withdrawal penalties waived. Even if you don't plan to tap your IRA now, the Internal Revenue Service considers withdrawals made before age 59 1/2 as "early."

Avoiding the Taxman

In some cases, an early withdrawal might not be taxable. An IRA withdrawal that you roll over into another retirement account won't be hit, as long as you roll the funds over within 60 days from the withdrawal date. If you have a Roth IRA, withdrawals of money you contributed to the account also aren't taxable, since you've already paid taxes on the cash used to fund it. However, you will pay taxes on any profits, or investment returns, you withdraw early, unless you have had the account five years and meet other requirements. Contributions you make to a traditional IRA using pretax dollars are subject to regular income taxes because you haven't paid taxes on that money yet.

Another Hit

Along with regular income taxes, you may have to pay a 10 percent early withdrawal penalty. The IRS tacks on this penalty when you receive a distribution from your IRA before you turn 59 1/2. However, you won't pay this penalty if you roll over your withdrawal or qualify to have the penalty waived. The IRS will waive the penalty if you ever suffer a total, permanent disability. You may also avoid the penalty if you use the money to pay for college tuition, medical expenses, health insurance while unemployed or a down payment on your first home.

Tax Bite

You regular income tax rate is calculated based on your filing status and the sum of your income from all taxable sources. Other types of taxable income include wages from your job, self-employment money, and interest and dividends from your other accounts. If you're married and file a joint return, your spouse's taxable income is also included in the calculation.

Don't Toss That Form

When you take money out of your IRA, you'll receive a 1099-R from the broker or mutual fund company that oversees your account at the end of the year. Don't toss this important tax document -- it provides details about your withdrawal, and may indicate whether all or part of it is taxable. The form also contains letter or number codes you'll need to report your transaction to the IRS. The agency also receives a copy of your 1099-R from the broker and will expect to see the information from it recorded on your tax return. You'll need to report this information, regardless of whether your withdrawal is taxable.

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.