IRA withdrawals/penalties

[Quit Screwing Me]

How does one figure out what the tax/penalty amount is if they were to cash in an IRA when they are not at retirement age?

 

I thought it was a 10% penalty, which is pretty straightforward. But what about taxes? Are the taxes calculated at your normal tax rate on the gains only, or the whole amount? If on the gains only, how does the IRS take into account that you took a deduction on the initial amount you put in.....surely they would want to tax that at this time as well.

[ICANHASMUNY?]

How does one figure out what the tax/penalty amount is if they were to cash in an IRA when they are not at retirement age?

 

I thought it was a 10% penalty, which is pretty straightforward. But what about taxes? Are the taxes calculated at your normal tax rate on the gains only, or the whole amount? If on the gains only, how does the IRS take into account that you took a deduction on the initial amount you put in.....surely they would want to tax that at this time as well.

 

 

I seem to remember that the whole amount is counted as income since you never paid taxes on it before. or took a reduction when you made the contribution.

 

- so your years annual income + the amount from the IRA will determine your tax rate. + a 10% penalty on the amount withdrawn.

 

 

 

 

you may be able to take a loan from it if it is a 401k

[Kevin20]

How does one figure out what the tax/penalty amount is if they were to cash in an IRA when they are not at retirement age?

 

I thought it was a 10% penalty, which is pretty straightforward. But what about taxes? Are the taxes calculated at your normal tax rate on the gains only, or the whole amount? If on the gains only, how does the IRS take into account that you took a deduction on the initial amount you put in.....surely they would want to tax that at this time as well.

 

 

First, this applies to traditional IRA's and not Roth IRA's.

 

Forget about "gains", the basic rule is that every penny you pull out of a traditional IRA is taxed as ordinary taxable income. (That's because the contributions were tax deductible and any gains were tax-deferred. You've never paid taxes on that money, so you pay the piper now.) Since that essentially is income above and beyond whatever other income you earn for the year, the arithmetic is that it's all taxed at your marginal rate. E.g., If you're in the 25% tax bracket, that's 25% tax you owe on what you withdraw.

 

Additionally, of course, if you pull money out prematurely without qualifying for any of the various exceptions, that's another 10% on top. So: tax bracket + 10% is your tax.

 

There are various exceptions, including that sometimes people have put in after-tax money into a traditional IRA, which amount would not be taxed if you pull it out. I highly recommend using a non-free version of Turbo Tax, if not a professional human, when it comes time to do the taxes to deal with this sort of stuff.