How to Determine Taxes on an IRA Distribution

A person may take distributions from a traditional Individual Retirement Account (IRA) for many reasons. However, you must pay taxes based on when and why you took a distribution. It's important to be able to determine the amount of taxes you're required to pay, as distributions are typically taxed the same year the distribution is made.

Instructions

Difficulty: Moderate

1. Determine how much money you need from your IRA. Knowing the amount you need distributed allows you to calculate the taxes on your IRA distribution.
2. Find out if you have made any Nondeductible Contributions to your IRA. Nondeductible Contributions are made to your IRA when you were unable to claim a tax deduction that year for your IRA contribution. If you have Nondeductible Contributions, your distribution is only partially taxable. In contrast, if you were able to claim a tax deduction in the year of the contribution, then your distribution is fully taxable.
3. Go to the IRS website and print out IRS Form 8606, Nondeductible IRAs. Fill out this form to compute the partial amount of tax you owe on your distributions from Nondeductible Contributions. Your tax adviser can assist you in attaining IRS Form 8606 as well as completing the form.
4. Calculate the fully taxable portion of your distribution from IRA contributions that have been deducted each year. To determine the taxable amount, simply use the amount of distribution and multiply by your federal income tax rate.
5. Ascertain whether you are subject to any additional taxes such as the 10 percent penalty for early withdrawals. The IRS requires that some distribution events, such as taking an early distribution before age 59 ½, be assessed an extra 10 percent tax penalty. However, distributions taken at normal retirement age, death or disability are not assessed the 10 percent penalty. There are some exceptions to the early withdrawal penalty, though, so talk to your tax adviser.