An IRA early withdrawal penalty is assessed on IRA withdrawals taken before you reach age 59 ½.
How does the IRA early withdrawal penalty work? Here’s an example:
- Suppose you are age 54 and you take $10,000 from your traditional IRA.
- The $10,000 shows up as income on the first page of your tax return.
- This income is included along with all other sources of income to determine the total amount of tax owed for the year.
- The amount of tax owed on the $10,000 will depend on your income tax rate, which is determined by your total income and deductions.
- In addition to tax on the $10,000 early withdrawal, a 10% penalty tax is assessed on the withdrawal.
- In this scenario that would be an additional $1,000 of tax owed in addition to your ordinary income taxes.
If you had plenty of taxes withheld during the year then despite the IRA early withdrawal, no additional taxes will be owed. If you did not have much in taxes withheld during the year, then upon completion of your tax return you will know the additional amount you will need to pay.
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