Bay Area Tax Attorneys Ainer & Fraker, LLP – Your age at the time that you make a taxable withdrawal from your Traditional IRA account can make a big difference in the amount of tax that you will pay. Generally, there are three periods within your lifetime where different tax rules apply:
- Under Age 59 ½—If you withdraw IRA funds before you reach age 59 ½, you will pay tax and a 10% early withdrawal penalty unless you can avoid the penalty through one of the several exceptions provided in the tax law. Note: Some states also have small early withdrawal penalties.
- Age 59 ½ to Age 70 ½—During this period, you can make withdrawals of any amount without penalty. You are only subject to income tax.
- Above Age 70 ½—After reaching age 70 ½, you must begin taking at least the required minimum distributions or face the 50% excess accumulation penalty.
The key to minimizing taxes on IRA distributions is to match withdrawals to tax years, in which case you are in a low-tax bracket or even have a negative taxable income. Take, for example, a year when your income—because of illness, disability, unemployment, or large business losses—is less than your deductions and personal exemptions, which leaves you with a negative taxable income for the year. To the extent that your taxable income is negative, you could make a taxable IRA withdrawal and avoid any tax on the amount withdrawn. In this case, even if you were under age 59 ½, you would only pay the small early withdrawal penalty.
Generally, except as mentioned above, if you are under 59 ½, your IRA funds are not a good source of cash, except in cases of extreme need, simply because of the tax liability and penalties that come from withdrawing these funds early.
Click the following link to find out more about Early Withdrawal Penalty Exceptions.