How Taxes On Normal IRA Distributions Work

How Much Tax Will I Pay On A Normal IRA Distribution?

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

Normal IRA distributions (meaning you take the IRA distribution when you are over age 59 ½) are included in your taxable income in the calendar year in which you take the IRA distribution.

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.

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.

Additional taxes on early IRA distributions

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.

A typical example

Let's look at someone single, 59 years old (born on February 15th for example), who is self paying for health insurance, and of course other 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 form 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 and some deductions - and when all is factored in taxable income will be $42,000 in total.

Let's consider the timing of the distributions. This person will be 59 ½ on August 15th. So, there are going to be penalty taxes for premature distributions for the months of January, February, March, April, May, June, July, and August. Eight months of $2,500 distributions totals $20,000. Of this amount, the penalty is 10% or $2,000.

In addition to the penalty, income tax will also be due. The IRS 2014 1040 tax table demonstrates this to be $6,363 for a single person with $42,000 of taxable income. So total tax owed for the year would be $8,363.

If this person had taxes withheld from their IRA distributions as they took them then enough may have been pain already. 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, do not forget to set aside money for the taxes -  and be aware of timing considerations that could save you money.

In this scenario, if this person could have waited to take distributions until November 1st (after age 59 ½), and then taken the entire $30,000. The income tax would have been the same but she/he would have saved $2,000 in penalty taxes.

Even if just the August payment was taken August 16th instead of the 1st, it would have saved $250 in penalty tax.

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