How to Calculate Federal Income Tax Owed to the IRS for Borrowing From a Traditional IRA

by Allison Westbrook

Traditional IRAs serve as tax shelters for retirement savings contributions made until age 59 1/2.. You pay no federal income taxes on the contributions you make -- deferring your federal tax liability until retirement. If you borrow money from your IRA before reaching the minimum withdrawal age, you may void your tax deferment, as well as incur an early withdrawal penalty.

Calculate the number of days you plan to keep the money you withdraw from your individual retirement account. If you replace the money into the same or another traditional IRA within 60 days of borrowing it, the IRS will count the withdrawal as a rollover, and you will owe no federal income taxes or early withdrawal penalties.

Multiply the taxable amount of your IRA withdrawal amount by 10 percent if you will keep your IRA distribution for more than 60 days. This is the amount of the early-withdrawal penalty you owe the IRS in addition to federal income tax on the distribution. Complete IRS Form 5329, Additional Taxes on Qualified Plans, when you file your federal income taxes. The IRS will combine the 10 percent penalty with your total tax liability.

Report the amount of your IRA distribution with your gross income on IRS Form 1040 when you file federal taxes for the tax year. Deduct any borrowed amount that you also re-deposited into the same or another traditional IRA account during the same tax year. Calculate your federal income taxes routinely, and pay federal income taxes on your total income according to your tax bracket.

Tip

  • If you need to borrow money from your IRA because you have become disabled, need to pay for a tax-deductible medical expense, require the money to help pay for college tuition or you need up to $10,000 to fund the down payment on your first home purchase, the IRS will not impose any early withdrawal penalties on the amount you borrow. You’ll also receive an early withdrawal penalty waiver if you need to pay for a federal tax levy or for health insurance premiums during qualified times of unemployment.

Warnings

  • You may only take a rollover withdrawal once every 12 months. If you utilize the 60-day rollover from your IRA more than once in a 12-month period, you’ll pay early IRA distribution taxes and penalties.
  • If you borrow from your traditional IRA for less than 60-days and redeposit the money into a Roth IRA in the allotted time period, you will not owe a 10 percent early withdrawal penalty, but must pay income taxes on the amount of your withdrawal.

Items you will need

  • IRS Form 5329
  • IRS Form 1040

About the Author

Allison Westbrook is an experienced writer of three years with a passion for creating relevant articles for a wide readership. She attended Kilgore College and majored in English. Allison's articles have appeared on such websites as eHow and Trails.com. Her reflective writing angles deliver focused and consistent content.

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