Understanding the tax repercussions of withdrawing from an IRA account is integral to retirement planning, and becoming acquainted with all applicable rules and regulations (such as RMDs).
Typically, RMDs must begin being taken by those aged 73 or face penalties from the IRS. There may be exceptions in cases involving disability, buying your first home, medical costs that surpass expected expectations or other extraordinary situations.
Withdrawals from IRAs are taxable
Withdrawals from an IRA are generally subject to taxes; the exact amount depends on how much of your contributions were deductible. To calculate this figure, divide cumulative nondeductible contributions by your total balance at year-end in all of your IRAs, then multiply this result by how many withdrawals were made during that year. You can use an online calculator or another resource such as Excel to estimate both tax-free basis and taxable amounts of withdrawals made during 2018.
Withdrawals from traditional IRAs generally incur a 10% penalty and income taxes if taken before age 59 1/2; however, certain expenses such as unreimbursed medical expenses exceeding 7.5% of adjusted gross income or first-time home purchases qualify for penalty-free withdrawals.
People who receive an IRA as a gift may need to consider some unique tax implications when receiving it as an inheritance from either their parents or spouses. One potential risk associated with inheriting an IRA could push them into higher tax brackets, potentially destabilizing your retirement savings plans. Working with a trusted financial advisor, strategies can be found that can prevent this situation and ensure your funds stay invested for your retirement savings goals.
Withdrawals from IRAs are penalty-free
Individual retirement accounts (IRAs) can be an effective tool for saving for retirement. However, it’s essential that you understand the tax repercussions associated with withdrawals – depending on when and how you withdraw funds, penalties could apply in addition to income taxes. It is also vital that you know how much of your IRA funds you can withdraw without incurring penalties.
Most IRA withdrawals are taxed, but there are exceptions. You may use penalty-free withdrawals from a traditional IRA to cover qualified medical expenses exceeding 7.5% of adjusted gross income or higher education costs for yourself or family members.
Penalty-free withdrawals may also be used to purchase your first home or cover financial emergencies. While these withdrawals are subject to income tax rates similar to regular IRA withdrawals, there may be certain requirements you need to fulfill in order to be eligible – an experienced tax professional can help determine which option best applies in your situation.
Withdrawals from IRAs are in-kind distributions
As withdrawals from traditional IRAs are made up of pre-tax dollars, withdrawals will typically be taxed by the IRS according to their taxable income and earnings. You can reduce or avoid paying these taxes altogether by rolling over distributions into another IRA or 401(k) within 60 days.
Those withdrawing funds before age 59 1/2 will incur an early withdrawal penalty of 10% in addition to ordinary income tax rates, though you can potentially avoid it by using your IRA funds for unreimbursed medical expenses, qualified first-time home purchases or higher education expenses.
As the rules surrounding IRA withdrawals can be complex, it’s wise to consult a financial advisor in order to plan your retirement savings effectively. SmartAsset’s free advisor matching tool makes finding advisors in your area simple; meeting with multiple advisors before choosing one and making informed decisions regarding your retirement strategy.
Withdrawals from IRAs are nondeductible contributions
If you maintain a non-deductible contribution account, the portion of each withdrawal that is taxable depends on the ratio between contributions and earnings. This taxable amount must be withheld during income tax withholding; Forms 990-T or 990-W must also be filed to report it as gross income in its respective year of receipt.
If the withdrawal occurs prior to age 59 1/2, income taxes and an early distribution penalty of 10% will apply. You may be exempt from paying this early distribution penalty if funds are used for unreimbursed medical expenses exceeding 7.5% of your AGI; first-time home purchase; or qualified higher education expenses.
To avoid early withdrawal penalties, it’s crucial to make timely Required Minimum Distributions (RMD). Your RMD depends on your life expectancy and balance in your IRA as of December 31 of the prior year; an online calculator can assist in calculating it.
