Now that you’ve taken some money out of your IRA, you must be wondering how much you’ll owe in taxes on it. The answer to this question depends on several different factors. Typically, any money taken out of an IRA is taxed based on the account holder’s age and his reason for withdrawing the money. Since your IRA trustee must report this distribution to the IRS on form 1099-R, you can also use this form to determine your tax liability.
According to the IRS, any distributions you receive from a traditional IRA are taxed as income in the year you receive them. However, there are circumstances in which the entire distribution may not be taxed. For instance, a distribution is only partially taxed if the traditional IRA includes both nondeductible and deductible contributions. In this case, only the portion of the distribution that is considered a deductible contribution is taxed as income for the year. With a Roth IRA, only non-qualified distributions are taxed as income. If the taxable amount is not noted under section 2a of your 1099-R form, you may use tax form 8606 to determine the taxable amount.
Early Distribution Tax Penalty
In addition to paying any applicable federal and state income taxes on a distribution, you may also be subject to a 10 percent tax penalty on any early distribution from your IRA. The IRS defines an early distribution as any money taken from a traditional IRA before the account holder reaches the age of 59 1/2. This tax penalty also applies in most cases for early distributions from a Roth IRA.
Required Minimum Distributions
By the time you reach the age of 70 1/2, you will need to start taking minimum distributions from your traditional IRA. The IRS refers to these distributions as required minimum distributions. These minimum distributions are taxed as income in the year that you receive them. This applies regardless of the year in which you were required to take the distribution. With Roth IRAs, account holders are never required to receive minimum distributions.
If you’ve used an IRA distribution to pay for medical insurance, medical expenses or to help cover the cost of a higher education or the purchase of your first home, you may be able to avoid the 10 percent early distribution tax penalty under one of several exceptions to the IRS’s age 59 1/2. In some cases, these exceptions also allow individuals who are disabled, beneficiaries of a deceased IRA account holder or qualified military reservists to avoid this tax. If you have received an early distribution, and section 7 of form 1099-R is noted with a code 2, then you will not be required to pay the 10 percent tax.
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