How to Calculate Federal & State Tax on an Early Withdrawal IRA

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Most distributions from an Individual Retirement Account are taxable. Since you generally don't pay tax on money you contribute, you must pay tax on your earnings when you take them out. An exception to this rule is the Roth IRA, which you can only fund with money that's already been taxed. If your state has an income tax, you must pay state tax in addition to federal tax on non-Roth distributions. Additionally, if you take an early distribution, defined by the Internal Revenue Service as a withdrawal before age 59 1/2, you'll owe a 10 percent federal penalty.

Things You'll Need

  • Current federal tax brackets
  • Current state tax brackets

Document the amount of your distribution. You'll need the exact amount you've withdrawn or intend to withdraw to calculate your total taxes owed.

Determine your marginal income tax rate. Your marginal tax bracket is typically higher than your average tax rate, since the marginal rate is the percentage you pay on the last dollar of income you earn. When you combine all the income you earned for the year with the amount of your IRA distribution, you'll have your total income. Your marginal rate is the tax bracket you're in based on your total income, as determined by federal tax tables. For example, for tax year 2011 the highest federal tax rate is 35 percent. If you fall into this tax bracket based on your income and your filing status, that makes your marginal tax rate 35 percent as well.

Determine your state marginal tax bracket. The process for determining the state tax rate on your IRA distribution is the same as with your federal tax rate. Only nine states have no income tax. The remaining 41 have state tax boards that determine and publish tax brackets annually.

Multiply your tax rates by the amount of your distribution. Do this once for your federal tax and once for your state tax.

Add the federal and state results. This will give you a combined total of federal and state taxes owed on your IRA distribution.

Calculate your early distribution penalty. Multiply the amount of your early distribution by 10 percent to determine your federal penalty. Some states, including California, charge an additional penalty, so check with your state tax board to see if you owe an additional state penalty.

Add the amount of your taxes to the amount of your penalties. This is the total amount you will owe for your early distribution.

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