Whenever you take money from a traditional IRA, you have to pay taxes at your ordinary, or marginal, income tax rate. If you withdraw money from your traditional IRA before you reach age 59 1/2, you must pay an additional 10 percent penalty on the amount. You must also pay income tax and penalties on distributions of earnings you take before age 59 1/2 from a Roth that has not been open for at least five years. Calculating the tax liability before you make the withdrawal is good practice.
Qualified Distributions - Traditional IRAStep 1
Work through the first page of IRS Form 1040 to find your modified adjusted gross income for the year. The MAGI is typically the figure you record on the last line of the first page of Form 1040.
Look up your marginal income tax rate on the IRS tax rate table. On the table, income tax rates are displayed according to modified adjusted gross income spans. For example, for tax year 2012, the tax rate for MAGI of $142,701 to $217,450 is 28 percent. You can find the IRS tax rate schedule online.
Multiply the amount of your IRA withdrawal by the marginal income tax rate for the year. Express the percentage figure as a decimal. For example, $20,000 times 28 percent equals $5,600.
10 Percent Penalty - Early WithdrawalStep 1
Calculate your modified adjusted gross income for the tax year.
Find your tax rate for the year on the IRS tax rate schedule.
Multiply the withdrawal amount by the tax rate.
Multiply the withdrawal amount by .10. The early withdrawal penalty tax rate is 10 percent.
Add the penalty tax figure to the ordinary income tax figure to arrive at your total tax liability for the withdrawal.
Items you will need
- Income records for the year (paystubs, Forms 1099, etc.)
- Roth IRA owners are free to withdraw contributions (principal) at will without tax or penalty.
- You can sidestep the early withdrawal penalty if you use the money to fund a first-home purchase, cover higher education expenses, or to pay medical expenses that exceed 7 percent of your MAGI. For a full list of exceptions, refer to IRS Publication 590.