Tax on Early Distributions of a Traditional IRA

by Jane Meggitt

Traditional individual retirement accounts (IRA) allow taxpayers to set aside pretax earnings for retirement, and possibly deduct the amounts from federal income tax if meeting the annual adjusted gross income requirements or lacking an employer-sponsored retirement plan. However, withdrawing funds from IRAs before the age of 59 1/2 can lead to taxes and additional penalties.

Traditional IRA Contributions

At the time of publication, individuals under the age of 50 may contribute $5,000 annually to a traditional IRA, if earning at least that much during the year. Those over 50 may contribute up to $6,000 annually, but contributions cannot be made to a traditional IRA once the account holder reaches the age of 70 1/2. That is also the age at which withdrawals become mandatory. While anyone with earned income may contribute to a traditional IRA, not everyone can deduct the contributions.


Whether you can deduct contributions to a traditional IRA depends on your adjusted gross income and other retirement provisions. Anyone not covered by an employer-sponsored retirement plan, such as a 401k, may deduct traditional IRA contributions. At the time of publication, those filing singly with an adjusted gross income (AGI) of $56,000 or less may take a full deduction on traditional IRA contributions even if covered by an employer retirement plan. If making an AGI of up to $66,000, a single filer may take a partial deduction, but over that amount no deduction is permitted. If married filing jointly, and both spouses are covered by a retirement plan but make less than $89,000 AGI, they may take a full deduction. If making up to 109,000 AGI they may take a partial deduction. Over that amount, no deduction is allowed.

Early Distribution Tax and Penalties

The minimum age for taking distributions from a traditional IRA is 59 1/2. Distributions made before that date are not only subject to tax as ordinary income, but an additional 10 percent penalty levied by the Internal Revenue Service for the early distribution. While there are no exceptions for the ordinary income tax, there are situations in which the 10 percent penalty does not apply.

Penalty Exceptions

Individuals making early IRA withdrawals to pay for the higher education expenses of themselves, their spouses, children or stepchildren are not subject to the 10 percent tax penalty. Qualified educational expenses include tuition, room and board for students enrolled at least half-time, books, fees and necessary supplies and equipment. Those making withdrawals due to legal disability, purchase of the first home or paying medical expenses over 7.5 percent of the adjusted gross income are also not subject to the 10 percent tax penalty.