How Much Tax Do I Pay on an IRA Withdrawal After Retirement?

Tax implications of withdrawing funds from an IRA depend on the reason for withdrawal and your current income levels. For example, withdrawing money for unreimbursed medical expenses could increase income taxes at retirement.

Withdrawals before age 59 1/2 typically incur a 10 percent penalty, barring one of the exceptions listed here. But there are strategies that may lessen its impact.

Taxes

As you may already be aware, IRA withdrawals are subject to tax. How much tax you owe depends on several factors including age and the balance in your account; traditional, SEP, and SIMPLE IRA withdrawals are taxed at your ordinary income tax rate while withholding may also apply depending on IRS rules; exceptions do exist including higher education fees that exceed 7.5% of adjusted gross income as well as first time home purchases that qualify as non-penalty distributions from an IRA account.

Roth IRA withdrawals are generally tax-free as your contributions were already taxed, though you could owe an early withdrawal penalty of 10% if you withdraw earnings before age 59 1/2. A rollover into another IRA may help, provided it’s done using trustee-to-trustee transfer; using direct transfers ensures you will meet the 60 day time limit and thus don’t risk facing this charge.

Penalties

If you withdraw funds before reaching age 59 1/2, income taxes and an early withdrawal penalty of 10% will apply to earnings taken out. To avoid the penalty altogether, use a formula that determines when and how much must be withdrawn annually based on life expectancy and account balance; tables can be found in IRS Publication 590-B as your guideline.

Other exceptions to the early withdrawal penalty may include unreimbursed medical expenses that exceed 7.5% of adjusted gross income and purchasing your first home. It may also be waived if you’re totally and permanently disabled or the beneficiary of an IRA owned by a deceased spouse; always consult with an experienced tax professional prior to taking an IRA distribution to ensure you follow all appropriate procedures and qualify for all available exemptions.

Withdrawals

Although your contributions were pretax, when withdrawing it the IRS will take its cut. Traditional IRA withdrawals are treated like any other income and taxed at your ordinary income rate in the year of withdrawal. Withdrawals before age 59.5 without penalty may be made if needed for certain circumstances such as qualifying higher education fees, unreimbursed medical expenses exceeding 7.5% of adjusted gross income or first time home purchases; qualified reservists called to active duty for at least 179 days can withdraw without penalty as well.

Access your IRA savings at any time without incurring penalties, but remember to pay taxes on any taxable amounts. An exception exists if you are self-employed or run a small business and use either SEP IRAs or SIMPLE IRAs; then federal withholding can be reduced or waived entirely.

Roth IRAs

Roth IRAs provide many advantages to low and moderate income earners when used for retirement savings purposes; however, tax rules differ depending on how you utilize this account. For instance, withdrawals made to cover qualified higher education expenses will not incur taxes at withdrawal time.

On the other hand, if you withdraw investment earnings before reaching age 59 1/2 or under certain circumstances, they will be subject to income taxes and must be reported.

While a Roth has few restrictions for retirees, one stipulation must be noted: You may only withdraw penalty-free earnings five years after making your initial contributions – otherwise a 10% early withdrawal penalty and taxes at your current rate will apply. When calculating this rule, the IRS looks at all your original contributions, principal withdrawals and earnings to determine whether this rule has been fulfilled.


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