The California Penalty for Early IRA Distribution
If you take a distribution from most IRAs before you reach the age of 59 1/2, both the federal government and the State of California will consider that distribution to be premature. An IRA is intended to be a vehicle for amassing retirement savings, and distributions before 59 1/2 are typically not used for retirement purposes. As a result, you may owe taxes and penalties to both the IRS and the State of California if you are a California resident.
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California Early IRA Withdrawal Penalty
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The penalty in the State of California for taking an IRA distribution before age 59 1/2 is two-and-one-half percent of the amount withdrawn. The State provides 12 distinct exemptions to this penalty tax, including distributions due to an IRS levy, distributions for higher education expenses, and those due to permanent and total disability. If you are subject to the penalty tax, you must complete California tax Form FTB 3805P. Enter the amount of the penalty tax on line 63 of your California state income tax return Form 540, along with the designation "FTB 3805P" next to it.
IRS Premature Distribution Penalty
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In addition to the California state penalty on an early IRA withdrawal, you will also have to pay a federal penalty on the distribution. The IRS penalty for early distributions is 10 percent, or four times the amount of the California penalty. The two penalties are cumulative, so you do not receive a credit on your federal income taxes when you pay the California penalty, but instead must pay a combined penalty tax of 12 1/2 percent.
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Taxation of Early IRA Withdrawals
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When you take a distribution from most IRAs, you must pay ordinary income tax on the entire amount of the withdrawal. In the case of a premature distribution in California, you must pay both federal and state taxes in addition to the penalties for which you are responsible. Depending on the tax bracket you are in, the total cost of an early IRA distribution in California could reach over 50 percent when you factor in all federal and state taxes and penalties.
Roth IRAs
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If you have a Roth IRA instead of a Traditional IRA, you may be able to avoid some of the taxes and penalties on an early IRA withdrawal. While early Roth distributions are subject to the same federal and California penalties as Traditional IRA distributions, the penalty only applies to the taxable amount of the distribution. As Roth contributions are after-tax contributions, you are only assessed the early withdrawal penalty on the earnings portion of your withdrawal, not your contribution. The IRS provides calculations to help determine the taxable portion in IRS Publication 590.
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