How to Understand an IRA Distribution
An IRA distribution refers to the payments you may or may not be receiving from your IRA. Your IRA, or Individual Retirement Account, is the retirement savings plan you set up that allowed you to make tax-free or tax-deferred contributions. Now, you've cashed in on it, and the IRA payments/distributions are rolling in. But before you spend this new windfall, there are a few things to figure out.
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Instructions
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Determine what kind of IRA you have. Most likely, you have either a traditional IRA or a Roth IRA.
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Prepare to pay income tax on your distributions if they are coming from a Traditional IRA. When you were making contributions to this account, your deposits actually counted as a deduction on your income taxes. But now, returning to you, they are subject to tax.
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Pay no tax if your distributions are paid out by a Roth IRA. Unlike Traditional IRA contributions, your Roth IRA deposits were not tax-deductible---the income you put into them was post-tax, and now you owe nothing on the distributions.
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Expect to pay an additional 10 percent penalty on Traditional IRA distributions if you have decided to cash them in before age 59-1/2. It's called a "retirement account" for a reason---it benefits you to wait until you've hit retirement age to spend it.
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Pay no additional fees on Roth IRA distributions that have been withdrawn before the age of 59-1/2. Not only are they tax-free, they have no early withdrawal penalty attached! (For many savers, this is a big advantage of the Roth IRA structure.)
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Understand that you must take out an IRA distribution, regardless of what kind of IRA you've invest in, by April 1 after you've turned 70-1/2. This is the required minimum distribution as stipulated by U.S. tax law for both types of accounts.
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Learn the situations in which you are allowed to take early Traditional IRA distributions without paying a penalty. These situations include using the IRA funds to pay for medical insurance while you are unemployed, and using the funds for various qualified education expenses.
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References
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