Although individual retirement accounts are supposed to be used for retirement savings, the Internal Revenue Service does allow you to take out money early. But it might cost you extra. Before you can calculate the taxes on your early IRA distribution, you must first figure out how much is actually taxable, which depends on the type of IRA. IRA distributions are taxed as ordinary income, so the rate you'll pay depends on which tax bracket you fall in. In addition to the income taxes, you'll also owe an early withdrawal penalty on the taxable portion of the distribution unless an exception applies.

## Traditional IRAs

Calculate the taxable portion of your early IRA withdrawal. For traditional IRAs, first figure the tax-free portion by multiplying your distribution by the amount of nondeductible contributions in the IRA, divided by the IRA value. Next, figure the taxable portion by subtracting the tax-free portion from your total distribution. For example, say you have $20,000 of nondeductible contributions in the traditional IRA and it's worth $100,000 at the time of your early distribution. If you take a $10,000 distribution, you would multiply $10,000 by $20,000 to get $200,000, then divide the result by $100,000 to find that $2,000 is tax-free. Next, subtract $2,000 from $10,000 to find that $8,000 is taxable.

## Roth IRAs

Roth IRAs are much simpler. First you withdraw your contributions tax-free, then, any earnings are taxable. For example, say you've made $20,000 in contributions and your Roth IRA is worth $100,000. If you take an early distribution of only $10,000, it all comes out of contributions so you don't owe any taxes or penalties.

Multiply the taxable portion of your distribution by your federal marginal tax rate to calculate your federal income taxes on your early IRA withdrawal. For example, if you fall squarely in the middle of the 25 percent tax bracket, and $8,000 of your distribution is taxable, you'll pay $2,000 in federal income taxes.

## Tax Bracket Considerations

Your taxes might be higher if your IRA distribution pushes you into a higher tax bracket. However, only the portion that falls in the higher bracket will be taxed at the higher rate. For example, say $6,000 of your distribution falls in the 25 percent bracket and $2,000 falls in the 28 percent bracket. Only the last $2,000 is taxed at 28 percent.

## State Taxes

Multiply the taxable portion of your distribution by your state marginal tax rate to figure your state income taxes on your early IRA withdrawal. For example, if you fall squarely in the middle of the 5 percent tax bracket and $8,000 of your distribution is taxable, you'll pay $400 in state income taxes.

Subtract the amount of any exemption from the early withdrawal penalty on the taxable portion of your distribution. For example, if you're using $5,000 of the distribution for qualified higher education expenses, and only $8,000 is taxable, you'll only owe the additional tax penalty on $3,000 of the distribution. Multiply the portion of your distribution that gets hit with the early withdrawal additional tax penalty by 10 percent to figure the penalty. In this example, multiply $3,000 by 10 percent to find you'll owe a $300 penalty.

#### Warning

- Your taxes might be higher than you calculated with your marginal rate in steps 2 and 3 if your IRA distribution pushes you into a higher tax bracket. However, only the portion that falls in the higher bracket will be taxed at the higher rate. For example, say $6,000 of your distribution falls in the 25 percent bracket and $2,000 falls in the 28 percent bracket. Only the last $2,000 is taxed at 28 percent.

#### References

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