How to Calculate How Much Taxes I Have to Pay on IRA Withdrawal
By: Mark Kennan
Reviewed by: John Csiszar, CFP, 1996-2010
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Does Cashing in My IRA Affect My Tax Bracket?
IRA withdrawals must be recorded on your income tax returns, even if you do not owe any tax. When you take a qualified distribution from a Roth IRA, meaning you are at least 59 1/2 years old and the account has been open for at least five years, you may withdraw as much as you want without paying any income taxes. With a withdrawal from a traditional IRA, the entire amount is taxable unless you made nondeductible contributions, qualified or not. However, if you take an early distribution, you also owe a penalty unless an exception applies. You can find an IRA withdrawal calculator online to figure out your taxes, but you can also calculate them on your own.
Calculate IRA Distribution Tax
If you have a traditional IRA, first figure out the taxable portion by subtracting any nondeductible contributions made from the IRA's value at the time you took the IRA withdrawal. If you made no nondeductible contributions, the entire amount is taxable. For example, if your traditional IRA contains $26,000 of nondeductible contributions and has a value of $41,000, $15,000 of the traditional IRA is taxable. Then, divide the taxable portion by the total value to find the portion of your distribution that is taxable. Using the example, divide $15,000 by $41,000 to get 0.36585. This means 36.585 percent of your distribution counts as taxable income in this example. Finally, multiply the result by the total distribution you took to find the portion that you have to include as part of your taxable income. For this example, if you took out $3,000, multiply $3,000 by 0.36585 to get $1,097.55.
If you are taking an early distribution from a Roth IRA, subtract your Roth IRA early-withdrawal amount from the contributions in the account to find the taxable portion of your Roth IRA distribution. Unlike a traditional IRA, the IRS does not require you to apportion your distribution between contributions and earnings with a Roth IRA. Instead, all contributions come out first. Then, multiply the result by your marginal tax rate to figure out the taxes.
Note that if you take a nonqualified withdrawal from your IRA, you must pay an additional 10 percent as a penalty on the taxable portion of the withdrawal, unless you fall under an exception. You can find an IRA withdrawal penalty calculator, or simply multiple the taxable amount by 0.10 to calculate the penalty.
The Tax Cuts and Jobs Act changed the income tax brackets, so your marginal tax rate may have changed. If you're single, the following tax brackets are in effect for the 2018 tax year:
10 percent for income between $0 and $9,525;
12 percent for income between $9,525 and $38,700;
22 percent for income between $38,700 and $82,500;
24 percent for income between $82,500 and $157,500;
32 percent for income between $157,500 and $200,000;
35 percent for income between $200,000 and $500,000; and
37 percent for income over $500,000.
If you're single and your taxable income is $100,000 per year, for example, your marginal tax rate is 24 percent, which is the top bracket in which your income falls. This means your taxable IRA withdrawal will be taxed at 24 percent.
For married couples filing jointly, the tax brackets are:
10 percent for income between $0 and $19,050;
IRS.gov: Publication 590
Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Mar. 20, 2020.
Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed June 19, 2020.
Internal Revenue Service. "Traditional and Roth IRAs." Accessed June 19, 2020.
Internal Revenue Service. "Traditional IRAs." Accessed Mar. 20, 2020.
Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed June 19, 2020.
Internal Revenue Service. "Roth IRAs." Accessed Mar. 20, 2020.
Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Mar. 20, 2020.
Internal Revenue Service. "Designated Roth Accounts - Distributions." Accessed Mar. 20, 2020.
Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed June 19, 2020.
If you take a nonqualified withdrawal from your IRA, you must pay an additional 10 percent as a penalty on the taxable portion of the withdrawal, unless an exception in your case.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."