IRA withdrawals must be recorded on your income tax returns, even if you do not owe any tax. When you take a qualified distribution from a Roth IRA, meaning you are at least 59 1/2 years old and the account has been open for at least five years, you may withdraw as much as you want without paying any income taxes. With a withdrawal from a traditional IRA, the entire amount is taxable unless you made nondeductible contributions, qualified or not. However, if you take an early distribution, you also owe a penalty unless an exception applies.
Subtract any nondeductible contributions made to your traditional IRA by the traditional IRA's value at the time you took the IRA withdrawal, to figure the taxable portion of the traditional IRA. If you made no nondeductible contributions, the entire amount is taxable. For example, if your traditional IRA contains $26,000 of nondeductible contributions and has a value of $41,000, $15,000 of the traditional IRA is taxable. If you are taking an early distribution from a Roth IRA, subtract your Roth IRA early-withdrawal amount from the contributions in the account to find the taxable portion of your Roth IRA distribution, then skip to Step 4. Unlike a traditional IRA, on a Roth the IRS does not require you to apportion your distribution between contributions and earnings. Instead, all contributions come out first.
Divide the taxable portion of the traditional IRA by the total value of the traditional IRA to find the portion of your distribution. In this example, divide $15,000 by $41,000 to get 0.36585. This means 36.585 percent of your distribution counts as taxable income in this example.
Multiply the result by the total distribution you took to find the portion that you have to include as part of your taxable income. For this example, if you took out $3,000, multiply $3,000 by 0.36585 by $3,000, to get $1,097.55.
Multiply the taxable portion of your traditional IRA distribution by your marginal tax rate to find your taxes on your traditional IRA withdrawal. Your marginal tax rate refers to the income tax bracket you fall in for the year. You can find the income tax rate schedules in IRS Publication 17 (see Resources section). In this example, if you fall in the 22 percent tax bracket, multiply 0.22 by $1,097.55 to find you owe $241.46 in federal income tax on that IRA withdrawal.
- If you take a nonqualified withdrawal from your IRA, you must pay an additional 10 percent as a penalty on the taxable portion of the withdrawal, unless an exception in your case.
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