Only tax-deferred IRAs, such as traditional IRAs, require minimum required distributions starting in the year you turn 70 1/2 years old. Roth IRAs are exempt. Just because the IRS forces you to take the money out of your IRA does not mean it escapes income taxes, but you do not have to pay FICA taxes or self-employment taxes on the distribution.
Federal Income Taxes
Your IRA minimum required distribution must be included as part of your taxable income when you file your federal income taxes. Your financial institution sends you a Form 1099-R at the end of the year that shows the taxable portion of the distribution. When you file your income taxes, you must report the amount as a taxable IRA distribution. Since the IRS uses a progressive income tax rate, the tax rate on your minimum distribution will vary: the higher your total income, the higher the tax rate.
State Income Taxes
You also will owe state income taxes on your IRA minimum required distribution if your state has an income tax. If you live in a state without an income tax, your distribution will be tax-free. Many states also use a progressive tax rate structure like the federal government, which means that the higher your total income, the higher your state income tax rate will be on your IRA minimum distribution.
IRA Tax Withholding
When you take your distributions, your financial institution may withhold money for the income taxes you will owe at the end of the year. The federal income taxes withheld appear in box 4 of your Form 1099-R. State and local income taxes withheld, if applicable, appear in boxes 12 and 15, respectively. On your income taxes, include these amounts as part of your income taxes withheld, which reduces your tax liability.
Penalties for Failure to Take Minimum Distributions
If you do not take your minimum required distributions, you have to pay a 50 percent income tax penalty on the amount that you should have taken out. This applies both when you take out less than you are required to or when you take out nothing. For example, if your minimum required distribution equals $9,000, if you take out nothing you owe a $4,500 income tax penalty. Given that same minimum required distribution, if you only took out $5,000, you would owe a $2,000 penalty.
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