When you cash in an individual retirement account (IRA), you should be prepared to receive less than your total account value. With the exception of Roth IRAs, all IRAs are taxable. The amount you owe can vary based on a number of factors, including how much money you earn and your state of residence. You might also be liable for a penalty tax if you withdraw from your IRA prematurely.
How much federal tax you have to pay when you take an IRA distribution depends on your marginal tax bracket. The top rate as of 2012 was 35 percent, for jointly filing married couples with taxable incomes above $338,350. The lowest rate was 10 percent, if your joint income was $17,400 or less. You must include the amount of your distribution in your income calculation. You don't have to have taxes withheld at the time of distribution, although that is a common option. If you prefer, you can pay the taxes when you file your income tax return.
If your state has an income tax, your IRA distribution will trigger state tax as well. For tax purposes, an IRA distribution is ordinary income, just like the income you see on your W-2 from wages or salaries. Most states have graduated income tax rates that top out below 10 percent, with Hawaii having the highest bracket at 11 percent. Washington, Nevada, New Hampshire, South Dakota, Florida, Texas, Tennessee, Alaska and Wyoming are the nine states with no income tax.
The IRS considers IRA withdrawals before age 59 1/2 to be premature, since the money in the account is intended for retirement. An early distribution will cost you a 10 percent penalty tax, on top of federal and state income taxes. As with your income taxes, you can choose to have this amount withheld at the time of distribution, or you can pay it when you file your taxes.
If your IRA is a Roth IRA, you don't have to worry about taxes when you cash in your IRA. To obtain this tax-free status, you have to be at least age 59 1/2 and your Roth has to have been established for at least five years. If either or these requirements is not met, you will have to pay tax on the earnings portion of your distribution, but not on your contributions. You'll also owe the 10-percent penalty tax if you're under age 59 1/2.
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- How to Figure the Tax Withholding on an Early IRA Withdrawal
- Do You Have to Claim Retirement Plan Monies on Federal Income Taxes?
- The Tax on Early Distributions From Retirement Plans
- How to File Taxes With 401(k) Distributions
- Tax Consequences for the Beneficiary of a Decedent's IRA
- Does California Tax a Roth IRA Conversion as Income?
- Are Distributions From a Roth IRA Taxable?