You must figure out the taxable amount when you take a distribution from your IRA. This is important because it determines how much tax you will have to pay on the distribution. In this guide, we will walk you through how to do that. It is not always easy to calculate, but you can do it with little effort!
Table Of Contents
- When Do You Pay Taxes On IRA Withdrawals?
- How Do I Figure The Taxable Amount Of An IRA Distribution?
- How Do I Figure The Taxable Amount Of A Traditional IRA Distribution?
- How Do I Figure The Taxable Amount Of A Roth IRA Distribution?
- How Do I Avoid The Penalty From The Traditional IRA Distribution?
- Next Steps
- Request A Quote
When Do You Pay Taxes On IRA Withdrawals?
You pay taxes on IRA withdrawals when you make a taxable distribution from the account. For example, traditional IRA withdrawals are taxed as ordinary income, while Roth IRA withdrawals are tax-free if the account has been open for at least five years and you are over 59.5 years old.
How Do I Figure The Taxable Amount Of An IRA Distribution?
When you take money out of your IRA, you may have to pay the IRS ordinary income taxes (State and Federal) on the amount withdrawn. You may also have to pay an early withdrawal penalty if you’re not yet age 59½.
How Do I Figure The Taxable Amount Of A Traditional IRA Distribution?
When you take a distribution from a traditional IRA, the IRS considers it 100% taxable income. That means you’ll owe ordinary income taxes on the entire distribution amount. In addition, you must subtract your federal and state income tax percentages from the total distribution.
Older than age 59 1/2
For example, if your traditional IRA distribution is $100 and your combined federal and state income tax rate is 30%, you’ll owe $30 in taxes. You would subtract 30% from the total distribution ($100), which leaves you with a taxable amount of $70.
Younger than age 59 1/2
If you’re under age 59 1/2, you may have to subtract an additional early withdrawal penalty (10%).
For example, suppose your traditional IRA distribution is $100, and your combined federal and state income tax rate is 30%. In that case, you’ll owe $30 in taxes plus an additional $10 for the penalty, which leaves you with a taxable amount of $60.
How Do I Figure The Taxable Amount Of A Roth IRA Distribution?
Roth IRA distributions are not subject to income taxes as long as the IRS rules are followed. However, if you’re under age 59 1/2, you may also be subject to an early withdrawal penalty (10%).
For example, suppose your Roth IRA distribution is $100, and you’re younger than 59 1/2; you’ll owe $10 for the penalty, which leaves you with a taxable amount of $90.
How Do I Avoid The Penalty From The Traditional IRA Distribution?
You can take a 72(t) distribution to avoid this penalty. A 72(t) distribution allows you to withdraw money from your IRA without penalty before age 59 1/2, as long as you adhere to specific requirements.
- Specifically, you must take at least five equal annual distributions based on your life expectancy.
- You must also begin taking distributions after leaving your job or younger than 59 1/2.
- Once you start taking 72(t) distributions, you’re generally committed to taking them for at least five years or until you reach age 59 1/2, whichever is longer.
Next Steps
When taking IRA distributions, don’t forget that the taxable amount is not always the same as the amount you receive. So be sure to plan and determine how much tax you’ll owe on your distribution to avoid surprises. Contact our team today if you need help determining your taxable amount or would like a quote for having us take care of the taxes for you. We’re more than happy to assist!
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