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.
Plan ahead for taxes on IRA distributions and tax time won't stress you out. Anne Rippy / The Image Bank / Getty Images

Once you reach age 59 1/2 you can take distributions from your IRA and you won't pay a penalty tax. But the amount you withdraw is still subject to income taxes. Normal IRA distributions are included on line 15a and/or 15b on your 1040 tax form. That means the amount you withdraw is included in the calculation that determines how much taxable income you have for that calendar year.

How Much Tax Will I Pay on the IRA Distribution?

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

 

If you look at a 1040 tax form, you will see on line 15 there is a place for “IRA distributions”. If your IRA was funded with pre-tax dollars, the full amount of the distribution will be taxable and will go in line 15b.

The amount of your IRA distribution is added to other sources of income you have 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 a lot of income and not much in deductions, expect to pay more tax on your IRA distribution than someone with less income and more deductions.

If you are not yet age 59 ½, a 10% penalty tax will also apply to the IRA distribution unless you qualify for an exception to the early withdrawal penalty tax.

IRA Distribution Taxation Example

Let's look at someone single, 60 years old, who needs IRA withdrawals to cover living expenses.

She/he needs to take $2,500 at the beginning of every month throughout the entire year. The money comes from an IRA rollover which came from a former employer's 401(k) plan originally.

The IRA rollover was not taxed when it was moved from the 401(k) plan as the transaction was done properly following all the rollover rules.

The funds went right from the 401(k) to the new financial custodian, so the IRA owner never had possession of the funds.

This person wants to have $2,500 available every month and have it automatically moved into a checking account. The day it leaves the IRA rollover it is considered a realized IRA distribution, which is subject to taxation.

Besides $30,000 in IRA distributions (12 times $2,500) s/he will also have other income from a pension of $12,000. Total adjusted gross income (AGI) is $42,000.

This person does not itemize deduction and so uses the standard deduction ($6,300 in 2016) and personal exemption ($4,050 in 2016). Take AGI, less the deduction and exemption amounts, and you get  $31,650 of taxable income.

The 2016 tax rates show that for a single person the first $9,275 of taxable income is taxed at a 10% rate. Taxable income from $9,276 to $37,650 is taxed at a 15% rate. The result: this person will pay $4,284 in taxes.

If this person had taxes withheld from their IRA distributions and from their pension at a 10% rate, then they would have paid enough in throughout the year.

If they did not have taxes withheld, they will have to write a check on April 15th and may owe an underpayment penalty tax also.

When factoring in your budget needs in retirement, do not forget to set aside money for the taxes.

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