Traditional IRA Payouts

by Herb Kirchhoff

When you own a traditional tax-deferred individual retirement account, you have choices regarding payouts from your IRA. Any distribution of funds from a traditional IRA will have tax consequences depending on your age and your reason for taking an IRA payout. To take a monthly, quarterly or annual distribution, you fill out your custodian’s distribution form and select whether you want a check or a direct deposit into your bank or brokerage account.

Regular Retirement

If you wait until you reach retirement age, which the Internal Revenue Service defines as age 59-1/2, you will owe federal income tax on the amount distributed to you but no penalties. You may also owe state income tax on your IRA retirement payouts. The taxes you owe will depend on your federal tax bracket at retirement and your state income tax rate.

Payout Amounts

If you are between 59-1/2 and 70-1/2, there are no minimum requirements or limitations on how much you can take out of your traditional IRA at any one time. When you reach age 70-1/2, federal tax laws require that you start taking a minimum annual distribution, figured each year by dividing your IRA balance by your remaining life expectancy. The IRS actuarial tables assume a taxpayer aged 70-1/2 will live to age 97.

Tax Withholding

To cover your federal and state income taxes, you can request your IRA custodian to withhold a portion of each retirement distribution for taxes, similar to how an employer withholds taxes from a paycheck. There is no set amount you must withhold for federal income taxes, and you can elect no tax withholding. IRA retirement payouts are subject to state income taxes in 40 states as of publication, with 11 of them requiring state tax withholding from IRA distributions. Residents of Alaska, Florida, Hawaii, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming and the District of Columbia don’t withhold state taxes because those states don’t tax IRA distributions.

Early Distributions

You can take a payout from your traditional IRA at any age, but payouts made before you turn age 59-1/2 are subject to a 10-percent federal penalty tax on early distributions plus income taxes. Further, early distributions are subject to mandatory federal income tax withholding equal to 20 percent of the distribution amount. You can avoid the 10-percent penalty tax, but not income taxes, if your early payout is to pay medical expenses exceeding 7.5 percent of gross income or health insurance premiums after losing your job. Other penalty-tax exemptions include early distributions to pay college tuition, buy or build your first home, or as part of an annuity-type payout arrangement.

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