How to Calculate an Early Distribution of an IRA
IRA stands for individual retirement account. The Internal Revenue Service promotes saving for retirement through these accounts by granting them special tax advantages. However, the IRS does not want the accounts to be used by people not saving the money for retirement. To discourage this, the IRS imposes an early withdrawal penalty on money withdrawn from IRAs before age 59 1/2. This penalty is on top of any taxes that may be owed.
Other People Are Reading
Instructions
-
-
1
Determine how much of your early IRA distribution is from contributions if you are taken an early distribution from a Roth IRA. With a Roth IRA, contributions come out before earnings and are completely tax-free and penalty-free. If your Roth IRA early distribution only contains contributions, you will not owe any taxes or penalties. If your Roth IRA contains earnings, only the earnings will be subject to taxes and penalties.
-
2
Determine if you qualify for an early withdrawal exemption to avoid the early withdrawal penalty. Early withdrawal exemptions include medical bills that exceed 7.5 percent of your adjusted gross income, if you have suffered a permanent disability, if you use the proceeds for higher education expenses such as tuition and fees and up to $10,000 for the costs of your first time home purchase.
-
-
3
Subtract the amount of money that is exempt from the early withdrawal penalty from your early withdrawal to determine how much of your withdrawal is subject to the early withdrawal penalty. For example, if you took out $12,000 but only $10,000 is exempt, you would owe a penalty on $2,000.
-
4
Multiply your early withdrawal amount subject to the early withdrawal penalty by 0.1 (10 percent) to calculate your penalty. If you are taking an early withdrawal from an SIMPLE IRA within two years of opening the account, multiply by 0.25 instead of 0.1. Continuing the example, if you were taking the withdrawal from a traditional IRA, you would multiply $2,000 by 0.1 to find your penalty would be $200.
-
5
Multiply the taxable portion of your early IRA by your marginal tax rate to calculate how much income tax you will owe on your early withdrawal. The taxable portion of your withdrawal is the entire amount for a traditional IRA and the portion from earnings from a Roth IRA. Your marginal tax rate is the highest tax bracket you fall into for the year. For example, if you took out $12,000 from your traditional IRA and fall in the 28 percent tax bracket, you would multiply $12,000 by 0.28 to find you would owe $3,360 in taxes.
-
1
References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
