Can I Avoid Paying Taxes on an IRA Withdrawal?

by Mark Kennan, Demand Media
    You might be able to avoid tax penalties, but not taxes, when you take IRA distributions.

    You might be able to avoid tax penalties, but not taxes, when you take IRA distributions.

    There's no magic trick to getting money out of your individual retirement account without paying Uncle Sam what he's owed -- no matter how sneaky you are. If the withdrawal is supposed to be taxed, you can't weasel your way out of it. However, there are some IRA withdrawals that don't count as taxable income.

    Roth IRA Contributions

    Though raiding your retirement account in your 20s probably isn't in your best interests long-term, you can take any contributions you've made to your Roth IRA without paying any taxes whenever you want -- no age restrictions apply. That's because your Roth IRA contributions weren't deducted on your taxes when you deposited the money. For example, if your Roth IRA currently has $15,000 in contributions in it, your first $15,000 of withdrawals aren't taxable.

    Roth Earnings

    If you've had your Roth IRA open for at least five years, you have the potential for a tax-free withdrawal of earnings. Usually, you have to be 59 1/2 years old, but if you're permanently disabled, you can get the earnings out tax-free, too. In addition, if you're a first-time homebuyer, you're allowed to take out up to $10,000 in earnings tax-free to pay for the home.

    Traditional IRAs

    The only way you can get a portion of your traditional IRA account out tax-free is if you've made nondeductible contributions to the account, meaning you've put money in and not claimed a deduction on your income taxes. If that's the case, you take a fraction equal to the fraction of your traditional IRA balance coming from nondeductible contributions of your traditional IRA out without paying any taxes. For example, if your traditional IRA contains $5,000 of nondeductible contributions and has $20,000 in it total, 25 percent of your traditional IRA distribution is tax-free.

    Penalty Exceptions

    When you're under 59 1/2 years old, you usually get slapped with a 10 percent penalty -- on top of owed taxes -- on your early IRA withdrawals. But there are ways to avoid this -- if you qualify. If you're taking money out of an inherited IRA, you're always safe from the penalty. You can also avoid paying extra if you have medical expenses that exceed 10 percent of your adjusted gross income, health insurance while you're unemployed and higher-education expenses.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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