Federal Tax Paid on IRA Withdrawal

Early Distribution

• An early distribution or withdrawal occurs before the beneficiary is at least 59 1/2 years of age. The IRS charges a 10 percent early distribution penalty in addition to a federal income tax. Early distribution penalty is also a federal tax. Some states may also charge a penalty tax for an early IRA withdrawal in addition to the state income tax.
  
  

Regular Distribution

• When the beneficiary reaches the age of 59 1/2, he may choose to take regular distributions from his retirement account. IRA distributions received as income are subject to federal and state income taxes. The IRS does not charge a withdrawal penalty after the beneficiary turns 59 1/2.
  
  

Mandatory Distributions

• Starting with the calendar year after the beneficiary turns 70 1/2, he must receive mandatory distributions. It can be a lump sum amount or annual calculated distribution. The amount of the annual distribution depends on the beneficiary's age and the balance in the account. If the IRA owner dies before he is 70 1/2, no minimum distribution is required. Federal and state Income taxes also apply to mandatory distributions.
  
  

Exceptions

• Although income taxes may still apply, the IRS waives the 10 percent early distribution penalty tax in certain situations. Exceptions include withdrawing the funds for non-reimbursed medical expenses, to purchase medical insurance, to cover higher education expenses or to purchase a first home. If the IRA owner has a short-term financial need, he can enroll into a Substantially Equal Payments Program (SEPP) for at least five years and receive distributions from the IRA. If the account owner becomes disabled before reaching 59 1/2 and takes a distribution, the IRA will also waive the penalty.