How to Withdraw Funds From a Tax-Deferred IRA

First home buyer distributions are penalty-free from a traditional IRA and tax-free from a Roth

First home buyer distributions are penalty-free from a traditional IRA and tax-free from a Roth

Withdrawing funds from your tax-deferred Individual Retirement Account is easy; paying taxes and penalties is the hard part. In general, you will always pay taxes on withdrawals from your traditional IRA, though the additional 10 percent penalty for withdrawals before age 59 1/2 may be waived in some circumstances. You can always withdraw your contributions to your Roth IRA tax and penalty-free. However, with certain exceptions, taxes and a 10 percent penalty apply to withdrawals of investment income before age 59 1/2 and/or before the plan has been in effect for at least five years.

Traditional IRA

Contact your IRA plan custodian and explain that you want to make a withdrawal from your IRA. Depending on the custodian and the reason for/amount of your withdrawal, you may be able to handle it by phone or online, or you may have to submit required paperwork.

Indicate on the forms the reason for the withdrawal. While withdrawals for qualified education expenses for you, your spouse or a dependent; medical expenses that exceed a certain portion of your adjusted gross income; purchase of a first home -- up to $10,000 -- and health insurance premiums if you are unemployed, may all allow you to waive the 10 percent early withdrawal penalty, the custodian will still most likely qualify these as an "early withdrawal."

Choose your tax withholding option. By law, if you do not specify otherwise, your custodian must withhold 10 percent of your distribution for federal income taxes. Your custodian may give you the option to have no taxes withheld or to have more taxes withheld. Complete other portions of the form or answer questions as required.

File IRS Form 5329 along with your 1040 federal income tax filing at the end of the year. Your plan custodian will send you a form 1099-R to use in your filing. Complete Part I to determine any penalty due on early distributions. If Line 4 of Part I is greater than zero, put that number on Line 58, form 1040. Include the full amount of your distribution on 1040, Line 15b. Add any amounts withheld to your withholding when calculating taxes due.

Roth IRA

Complete any forms required by your plan custodian to take a withdrawal and indicate if and how you want any taxes withheld. In the case of a Roth early distribution, only amounts attributable to investment income will be subject to tax and penalty.

Include IRS Form 5329 along with your annual federal income tax filing if any of your early distribution was from investment income. If this is the case, the amount subject to taxes and penalties will show up in Box 2a of the 1099-R provided by your plan custodian. The IRS allows you to take your contributions out first, so if you did not take out any more than you contributed, you will not have to file this form. Include amounts from Line 4, Part I on Line 58 of your 1040.

File IRS Form 8606, completing Part III. Follow the instructions for calculating your taxable amount, if any. If Part III, Line 36 is greater than zero, include that amount on Form 1040, Line 15b. Add any withholding to your other withholding when calculating if taxes are due.

Items you will need

  • IRA account statement
  • IRS Form 1099-R
  • IRS Form 1040
  • IRS Form 5329
  • IRS Form 8606 (Roth only)

Tips

  • Some states require withholding from retirement plan distributions, while others won't allow withholding. Other states have no income tax.
  • Some custodians may require a Medallion Signature Guarantee for withdrawals that exceed a certain amount.

Warnings

  • Allowable early withdrawals means you will not pay a penalty. It does not mean you will not pay taxes. If you withdraw funds for a qualified expense, such as education expenses or buying a home, be sure to put some of that money aside for taxes or decide where you will get the money when taxes are due.
  • The Roth first-time home buyer expense allowance of up to $10,000 is not taxed, but it is taxed from a traditional IRA.
  • If your early distribution was from a SIMPLE IRA, and you did not participate for at least two years, the penalty will be 25 percent rather than 10 percent.
 

About the Author

Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).

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