How are distributions from a Traditional IRA taxed?
Distributions from a traditional IRA are taxed as ordinary income, but if you made nondeductible contributions, not all of the distributions will be taxable.
In order to enforce the policy that IRAs be used for retirement savings, not for preretirement uses or for building an estate to pass on to heirs, the rules prohibit or strongly discourage both distributions before retirement age and distribution schemes that would leave most of an IRA undistributed at the end of the taxpayer's life expectancy.
Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of nondeductible contributions). The tax, which is payable in addition to the regular income tax on the distribution, applies to all IRA distributions but the following:
- Distributions to an IRA contributor after age 59 1/2 or on account of his or her disability.
- A series of substantially equal periodic payments, regardless of the taxpayer's age when they begin, if the payments are made annually or more frequently and continue for the life or lives of the taxpayer or the taxpayer and a beneficiary.
- Distributions to the estate or beneficiary of an IRA contributor after the contributor's death.
- A distribution “on account of” an IRS levy.
- Distributions to alternate payees under qualified domestic relations orders (QDROs).
- Distributions not exceeding the deduction allowed to the taxpayer for the year for medical expenses (generally, the amount by which expenses for medical care for the taxpayer, spouse, and dependents exceeds 7.5 percent of adjusted gross income).
- Distributions after the owner's “separation from employment” not exceeding amounts he or she pays for health insurance, provided (1) the individual receives unemployment compensation for at least 12 consecutive weeks, (2) unemployment compensation is received during the year of the distributions or the preceding year, and (3) the distributions occur before the owner has been reemployed for more than 60 days.
- Distributions not in excess of the owner's “qualified higher education expenses” for the taxable year.
- “Qualified first-time homebuyer distributions.”
Please contact one of our IRA Experts at 800-472-0646 for more information.