IRA Early Withdrawal Calculations
Under the rules of the federal tax code, making an early IRA withdrawal involves paying a penalty that reduces the amount of money you get to keep. The purpose of the penalty is to minimize the temptation of making a withdrawal before you approach retirement age, since IRAs are supposed to help fund your retirement. Be aware of how much of your early IRA withdrawal will cost you so you do not get stuck with an unexpected bill at tax time.
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Penalty
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The Internal Revenue Service levies a 10 percent penalty on the amount of your withdrawal if you take money from your IRA account before age 59 1/2. The penalty is payable when you file your federal taxes. Making an IRA withdrawal requires you to use Form 1040 -- rather than a shorter form such as 1040A or 1040EZ -- for submitting your federal taxes.
Federal Taxes
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Along with the 10 percent penalty, you owe standard federal income tax on the amount of your IRA withdrawal. The tax applies even if you wait until age 59 1/2 or later to remove the money from your account because the IRS considers an IRA withdrawal to be regular income .The tax rates are based on your overall income bracket, which ranged from 10 percent to 35 percent as of 2010.
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State Taxes
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The third component that may reduce the amount of your IRA withdrawal is state taxes. Tax rates vary by state, ranging from zero in states such as Florida and Texas to 6 percent in North Carolina. As of 2010, other states with higher tax rates for lower income brackets are Minnesota at 5.35 percent, Colorado at 4.63 percent and Michigan at 4.35 percent.
Considerations
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Keep in mind the money you will lose when you make an early withdrawal from your IRA. In the majority of cases, the most you will be able to keep is 80 percent. If you are in the lowest tax bracket and take $1,000 out of your account, for example, you will have to pay $100 as the early withdrawal penalty and $100 or more in federal taxes. You might owe more in state taxes. Furthermore, if your IRA withdrawal is large enough, it could push you into a higher income bracket and cause you to owe more taxes on all earnings.
Exceptions
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The IRA waives the 10 percent penalty if the early withdrawal takes place under certain circumstances. These circumstances include death or disability, medical expenses that exceed 7.5 percent of your adjusted gross income, higher education expenses, a first-home purchase and an IRS levy for back taxes. In such situations, you would still owe taxes on your withdrawal, but not the 10 percent penalty. You owe taxes on all withdrawals except in the case of rollovers to another IRA or qualified retirement account such as a 401k or in the case of certain charitable distributions.
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References
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