2017 - How Taxes on Normal IRA Distributions Work

Taxes on IRA withdrawals vary depending on your deductions and income

Man signing tax form that contains a taxable IRA distribution.
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Upon reaching age 59 1/2, you can start taking distributions from your IRA, and because of your age, you're now safe from paying any penalty tax. The amount you withdraw is subject to income taxes, which means your distribution is included in the calculation of total taxable income you have for that calendar year. You would include your normal IRA distributions on line 15a and/or 15b on your 1040 tax form.

What's the Tax on My Distribution?

The total amount of tax you pay on an IRA distribution depends on the total amount of income and deductions that you have that year.

When looking at a 1040 tax form, you will find line 15, called “IRA distributions.” Due to the tax-deferred nature of an IRA, any growth or capital appreciation you've received in your account has never been taxed. Additionally, if your IRA was originally funded with pre-tax dollars, you haven't yet paid any tax on that money either, so the full amount of your distribution is taxable and will go on line 15b.

Your IRA distribution is added to your other sources of income to determine your adjusted gross income. Your adjusted gross income is then reduced by allowable deductions and exemptions, and the result is your taxable income.

If you have higher income and very few deductions, expect to pay more tax on your IRA distribution than someone with less income and more deductions.

If you took a distribution but haven't yet reached age 59 1/2, a 10 percent penalty tax will also apply to the IRA distribution unless you qualify for an exception to the early withdrawal penalty tax.

Can I Move Funds Into an IRA From a 401(k)?

If you have money in a 401(k), you can choose to move the funds into an IRA through a process called a rollover. The funds for an IRA rollover are not taxed when moved from the 401(k) plan, as the funds go from one qualified tax-deferred retirement account to another.

Rollover transactions have specific rollover rules, which a bank or brokerage firm can explain to you as they take you through the process. As long as the funds go right from your 401(k) to the new IRA financial custodian, and you never take possession of the money, you won't trigger any tax liability.

IRA Distribution Taxation Example

Say that a single individual, 60 years old, needs IRA withdrawals to cover her living expenses. She needs to take $2,500 per month and wants to have it automatically moved into a checking account. Besides $30,000 in IRA distributions (12 times $2,500) she will also have other income from her pension of $12,000. This gives her a total adjusted gross income (AGI) of $42,000 for the year.

This individual does not itemize any deductions and instead uses the standard deduction ($6,350 in 2017) and personal exemption ($4,050 in 2017). With her AGI, less the deduction and exemption amounts, she has $31,600 of taxable income.

The 2017 tax brackets show that for a single person the first $9,325 of taxable income is taxed at 10 percent. Taxable income from $9,325 to $37,950 is taxed at a 15 percent rate. Consequently, she'll pay $4,274 in taxes.

If the woman had taxes withheld from her IRA distributions and pension distributions, she would likely have paid enough taxes throughout the year. If she did not have taxes withheld, she will have to write a check on April 15th.