When you contribute money to a traditional Individual Retirement Account (IRA), you deduct the amount you contributed from your income tax for the year. While you may save on taxes going into the IRA, you will have to pay tax on both the original amount of the IRA and any earnings on it, when you withdraw funds.
If you take a distribution, or withdraw, from a traditional or any type of IRA during the year, you must enter the amount on line 15 of IRS form 1040. You'll receive a 1099-R from the company that manages your IRA. In most cases, income tax will have already been withheld from your IRA distribution unless you specify that it not be withheld. The amount withheld will be printed on the 1099-R. In most cases, you'll complete Form W-4P, which states your marital status as well as any withholding allowances so that the proper amount of tax is taken out. The distribution is taxed based on your tax bracket when you withdraw the money.
You will have to pay a 10 percent penalty tax on most withdrawals taken from a traditional IRA before you turn 59 1/2-years-old. The 10 percent penalty is in addition to the regular income tax you would owe on the distributions. Depending on which state you live in, you may have to pay a state penalty tax for early distributions as well. If you contribute more than the maximum amount allowed to an IRA in a single year, you will have to pay a 6 percent tax on the excess amount every year it remains in the IRA.
Exceptions to the Penalty Tax
There are ways to withdraw from a traditional IRA early and avoid the penalty tax, but not the income tax. Use up to $10,000 from an IRA to pay for your first home without penalty. Other exceptions to the penalty include using money from your traditional IRA to pay for education expenses or to pay medical expenses that are more than 7.5 percent of your adjusted gross income. If you pass away, the person who inherits your IRA can withdraw funds without penalty. If you become disabled before age 59 1/2, you can take out money without penalty as well.
Age 70 1/2
When you have a traditional IRA, you must begin taking distributions by April 1 of the year after you turn 70 1/2. You need to withdraw a certain amount each year after age 70 1/2 to avoid paying a 50 percent excise tax on what the IRS considers "excess accumulations" in your IRA. To report this amount, you will need to complete form 5329 with your annual tax return.
- IRS; Publication 590; Are Distributions Taxable?
- IRS; Publication 590; What Acts Result in Penalties or Additional Taxes?
- IRS; Publication 590; When Must You Withdraw Assets?
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed June 19, 2020.
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed June 19, 2020.
- Internal Revenue Service. "Traditional IRAs." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed June 19, 2020.
- Internal Revenue Service. "Roth IRAs." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Designated Roth Accounts - Distributions." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed June 19, 2020.
Based in Pennsylvania, Emily Weller has been writing professionally since 2007, when she began writing theater reviews Off-Off Broadway productions. Since then, she has written for TheNest, ModernMom and Rhode Island Home and Design magazine, among others. Weller attended CUNY/Brooklyn college and Temple University.