To discourage taxpayers from dipping into their individual retirement accounts before turning 59 1/2 years old, the Internal Revenue Service adds a 10 percent early withdrawal penalty. This penalty adds to, rather than replaces, your income taxes on the distribution. However, the penalty only apply to the taxable portion, and in certain cases, part or all of your withdrawal may be exempted from the penalty. Understanding how the penalty is calculated helps you decide whether it is worth it for you to take an early IRA distribution.

1. Calculate the taxable portion of the early IRA distribution. For a Roth IRA, subtract the contributions in the Roth IRA from the amount of the distribution. If your contributions in the account exceed your early distribution, you owe no early withdrawal penalty. For a traditional IRA, unless you made nondeductible contributions, the entire amount is taxable. If you did make nondeductible contributions, figure the taxable portion by multiplying the percentage of the IRA consisting of deductible contributions and earnings by the amount of the distribution. For example, if your traditional IRA has 80 percent deductible contributions and earnings and you take a $9,000 early distribution, multiply $9,000 by 0.8 to find that $7,200 is taxable.

2. Subtract the value of any exemptions you have from the early withdrawal penalty from the taxable portion of the distribution to find the amount of the IRA early distribution subject to the early distribution penalty. Examples of expenses that are exempt from the early withdrawal penalty include up to $10,000 for your first home, medical expenses that exceed 7.5 percent of your adjusted gross income, qualified college expenses, health insurance premiums while unemployed or a permanent disability. For example, if $7,200 of your early IRA distribution is taxable and you have $3,000 in health insurance premiums you paid while unemployed, $4,200 of your distribution is subject to the early withdrawal penalty.

3. Multiply the amount of your early IRA distribution subject to the early withdrawal penalty by 0.1 to calculate the early distribution penalty. Completing this example, multiply $4,200 by 0.1 to find the early distribution penalty equals $420.

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