Sometimes you need the money in your individual retirement arrangement now, not when you reach retirement. You can cash out an IRA before you reach retirement age, 59 1/2-years-old, but you will need to pay a penalty tax in most cases. Depending on the type of IRA, you might also need to pay income tax on the amount you take out. File the tax amount you owe when you file your income tax return with the IRS for the year.
Look at the amount in box 1 of form 1099-R. The company that managed your IRA needs to send you form 1099-R at tax time. The amount in box 1 is how much you received from your IRA for the year. Enter the amount from box 1 on line 15b of the 1040 form if you cashed out a traditional IRA and owe tax on the entire amount.
Complete form 8606 if you cashed out a traditional IRA that you made non-tax-deductible contributions to, or if you cashed out a Roth IRA. You've already paid the income tax on those amounts and do not need to pay it twice. Record the appropriate amount from either line 15 or line 36 on form 8606 on line 15b on the 1040.
Fill out form 5329 to figure out the total penalty tax you owe on the cashed out IRA. You do not need form 5329 if you only cashed out one IRA and the code "1" is in box 7 of the 1099 R form. Instead, multiply the amount you withdrew by 10 percent to figure out your penalty. Record the penalty amount on line 58 of form 1040.
Items you will need
- Form 1099 R
- Form 8606 (optional)
- Form 5329 (optional)
- Form 1040
- There are exceptions to the 10 percent penalty if you withdraw from your IRA early. You can avoid the penalty if you use the money in your IRA to purchase your first home, pay for college and education expenses, or if you have medical expenses that are more than 7.5 percent of your income. You can also take an early distribution without penalty if you become permanently disabled or if you need to pay for health insurance premiums after being unemployed for at least 12 weeks.
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