Traditional Individual Retirement Accounts, or IRAs, offer tax-deferred growth for retirement savings. Contributions are tax deductible, the money grows tax-free, but the distributions are taxable. The Internal Revenue Service allows you to remove money at any time, but imposes a 10 percent early withdrawal penalty on withdrawals taken before you reach age 59 1/2. Liquidating an IRA is a two-step process: removing the money from the account and reporting the withdrawal on your taxes.
Things You'll Need
- Form 1040 or 1040A
- Form 5329
Complete the IRA withdrawal form, available from your financial institution. This form will require your account information and personal data, including your Social Security number.
Include the 1099-R that your financial institution sends out at the start of the next calendar year. The total amount of your traditional IRA is reported in box 1 and the taxable portion in box 2a. Unless you have made nondeductible contributions, your distribution amount will equal your taxable amount. If you have made nondeductible contributions, those contributions will reduce your taxable amount.
Report the taxable portion of your IRA as part of your taxable income on your income tax return using form 1040 or 1040A. If you are under age 59 1/2, continue to step 4.
Complete form 5329 to calculate the early withdrawal penalty if you are under 59 1/2 years old. The early withdrawal penalty equals 10 percent of the taxable portion of the withdrawal.