Regardless of your age, you'll need to file a 1040 form and show the amount of the IRA withdrawal. When you make a distribution from a traditional IRA, the IRS considers it to be 100% taxable income. That means you'll owe ordinary income taxes on the total amount of the distribution. You must subtract federal and state income tax percentages from the total distribution.
Your Roth IRA withdrawals are tax-free as long as you're 59 and a half or older and your account is at least five years old. Withdrawals from traditional IRA accounts are taxed as regular income, depending on the tax bracket of the year in which you make the withdrawal. Your tax advisor can tell you if you qualify for these or any other exceptions to the 10% early retirement penalty tax. Early next year, you'll receive a Form 1099-R from your IRA trustee or custodian if you make any withdrawals from your IRA this year.
To take advantage of this tax-free withdrawal, the money must have been deposited in the IRA and held for at least five years and must be at least 59 and a half years old. If you think you may need emergency funding before you retire, consider investing at least part of your money in a Roth IRA so you can access it without penalty if needed. There are several IRA options and many places to open these accounts, but the Roth IRA and the traditional IRA are by far the most popular types. In general, the taxable portion of a withdrawal from a traditional IRA before age 59 and a half is subject to a 10% early withdrawal penalty, in addition to the regular income tax applied.
The amount you'll pay in taxes when you withdraw money from an individual retirement account (IRA) depends on the type of IRA, your age, and even the purpose of the withdrawal. That way, you'll never have to touch the money or risk paying taxes for accidental early distribution, says Kristi Sullivan, certified financial planner with Sullivan Financial Planning LLC in Denver, Colorado. The money you deposit in an IRA should be money you plan to set aside for retirement, but sometimes unexpected circumstances get in the way. But before going into details, you should know that the Internal Revenue Service (IRS) refers to a withdrawal from an IRA as a distribution.
If you've made some non-deductible contributions over the years, those amounts will create a taxable base in your account, and every withdrawal from your traditional IRA will include a base amount. You won't owe any income tax as long as you leave your money in a traditional IRA until you reach another key age milestone. There are some exceptions due to financial hardship to the penalties for withdrawing money from a traditional IRA or from the investment earnings portion of a Roth IRA before turning 59 and a half years old. The other time you risk receiving a tax penalty for withdrawing money early is when you transfer money from one IRA to another qualified IRA.
You can also get rid of the tax penalty if you make a deposit in an IRA and change your mind before that year's extended tax return due date. The IRS exceptions are a little different for IRAs and 401 (k) plans; they even vary slightly for different types of IRAs.