If you take money out of a traditional individual retirement account, you generally will owe some tax. How much tax you owe depends on your tax bracket and whether you owe a penalty for taking money out prior to retirement age. Note that once you turn a certain age, you're required to take a minimum amount out of your IRA each year, or you can owe a steep tax penalty.
When you take money out of a traditional IRA, the money is treated as ordinary income, so the taxes you owe depend on your tax bracket and available deductions and credits. You may owe additional tax penalties if you take money out of such an account before retirement age.
IRA Tax Calculator Concepts
A traditional individual retirement account lets you put money into an account while you're working, deducting the amount of your contributions from your taxable income. You can open an IRA with a bank, brokerage firm or other institution of your choice. You can generally put $5,500 into IRAs each year, although you're allowed to put up to $6,500 once you turn 50. You will pay a penalty if you withdraw funds from your traditional IRAs before retirement age.
When you are 59 1/2 or older, you can withdraw money from your IRA without paying a penalty, though you will pay ordinary income tax on the money you take out. How much tax you owe depends upon your income tax rate, which depends on your total income, including retirement account withdrawals and any work or other investment income you may have.
For that reason, opening a traditional IRA can be especially useful if you expect you'll be in a lower tax bracket when you retire than when you're working. This is a common scenario, since people lose their regular salaries once they stop working.
Your total tax also depends on any deductions and credits you may have. Some common examples include deductions for mortgage or student loan interest and charitable donations or credits for dependent care.
You can use Internal Revenue Service tax tables or an online calculator tool to figure out what tax bracket you're in and estimate how much tax you'll pay on a particular IRA withdrawal you're considering. Remember that you'll also forego future earnings on money you take from your IRA to spend. You can find various online IRA withdrawal calculator tools that will also take this into consideration.
A different type of IRA, known as a Roth IRA, works differently. With a Roth IRA, you deposit money as you are working but pay tax as usual on that income. When you retire and withdraw the funds, including any investment gains, you owe no tax. You do owe a 10 percent penalty if you withdraw the funds early and no exceptions apply, but other than that, there's usually no tax on Roth withdrawals.
Required Minimum Distributions
Once you turn 70 1/2, you must take a minimum withdrawal from your IRA every year. This amount is called a required minimum distribution. If you don't do so, you can face a 50 percent tax penalty on the amount you failed to withdraw.
The rules for how much you must withdraw depend on how old you are and how much is in your accounts, but you can use IRS tables or an online required minimum distribution calculator to get the math right.
2018 Tax Law Changes
Tax rates are generally decreasing for 2018 under the new Tax Cuts and Jobs Act, which should mean most taxpayers will owe less money on their IRA withdrawals. Make sure to use the latest tax brackets for estimating how much you might owe on a withdrawal.
2017 Tax Rates
With higher tax rates in 2017, some taxpayers may have chosen to hold off on withdrawing from their IRAs until the newer, milder tax tables kicked in for 2018.
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- IRS: Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
- IRS: Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
- Bankrate: Required Minimum Distribution
- TIAA: Early Withdrawal Calculator
- 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.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.