Traditional Individual Retirement Accounts, or IRAs, offer tax-deferred growth for retirement savings. Contributions are tax deductible, the money grows tax-free, but the distributions are taxable. The Internal Revenue Service allows you to remove money at any time, but imposes a 10 percent early withdrawal penalty on withdrawals taken before you reach age 59 1/2. Liquidating an IRA is a two-step process: removing the money from the account and reporting the withdrawal on your taxes.
Complete the IRA withdrawal form, available from your financial institution. This form will require your account information and personal data, including your Social Security number.
Include the 1099-R that your financial institution sends out at the start of the next calendar year. The total amount of your traditional IRA is reported in box 1 and the taxable portion in box 2a. Unless you have made nondeductible contributions, your distribution amount will equal your taxable amount. If you have made nondeductible contributions, those contributions will reduce your taxable amount.
Report the taxable portion of your IRA as part of your taxable income on your income tax return using form 1040 or 1040A. If you are under age 59 1/2, continue to step 4.
Complete form 5329 to calculate the early withdrawal penalty if you are under 59 1/2 years old. The early withdrawal penalty equals 10 percent of the taxable portion of the withdrawal.
- IRS: Publication 590
- IRS: Form 5329 Instructions
- IRS. “What if I Withdraw Money From My IRA?” Accessed July 7, 2020.
- IRS. ”Topic No. 413 Rollovers From Retirement Plans.” Accessed July 7, 2020.
- U.S. Department of Labor. “FAQs About Retirement Plans and ERISA,” Page 13. Accessed July 7, 2020.
- IRS. “Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRA.” Accessed July 7, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."