After you cash in an IRA, besides the 20% penalty, what other taxes do you have to pay on it?

Question

I want to cash in mine because I quit my nice cushy job to be a full time student with next to no income. Also, cashing it in will still keep my income under $15,000.00 a year. Any information would be greatly appreciated!

Answer 1

It's only a 10% penalty, the income tax would be whatever tax bracket you end up at when you add that withdrawal to your total income for the year - if it's only going to be 15,000 total income including the gross withdrawal, the income tax should be about 10% plus the penalty

Answer 2

Qualified eduation expenses vis. the IRA withdrawal penalty is a little tricky.

Books do not count unless they were paid as part of your tuition.  The fact that you received a list of books to buy and bought them isn't good enough.

The IRA penalty *does* say that if you are at least a half-time student, room and board does count as a higher expense.  It won't change the income tax, but does help with the 10% penalty.  I would suggest finding out from the school what numbers they use for room and board.

One of my friends emptied his IRA to go back to school.  Between overall low income, education credits and the penalty exception, I don't think he paid very much in either income tax or penalty.  While he ended up with less money saved for retirement, he accidentally effected a form of income averaging.....

Answer 3

You will have to pay income taxes on it, if you didn't pay taxes on the contributions.

Answer 4

capital gains....cashing it in when you're young is a bad idea unless you're going to be homeless otherwise.

Answer 5

It's a 10% penalty.  

And there are exceptions to it such as:

death of the IRA holder, qualifying disability of the IRA holder,

certain medical expenses exceeding 7.5 percent of adjusted gross income, health insurance if an individual has been receiving unemployment compensation for more than 12 weeks, qualified higher education expenses, qualified first-time homebuyer expenses, etc.   Consult your tax preparer with regard to your specific situation.

While those are exceptions to the 10% penalty, you still would have to pay ordinary income tax on the funds withdrawn (you put them in without paying tax on them) as if the money was earned in the year of withdrawal.

It's got nothing to do with capital gains.

Answer 6

The penalty is 10%, not 20%.  They withhold tax at 20% and that  is credited to you on your tax return via the Form 1099-R that you will receive at year end.

The distribution is taxed as ordinary income.  If you're in a 15% tax bracket, the tax is 15% though bear in mind that if you are kicked into a higher bracket the higher rate will apply for the excess.  Then, if you are under age 59 1/2 or don't meet one of the other exceptions then a 10% penalty is added on top of the tax.  So, if you're in a 10% tax bracket, the 20% tax withheld will just cover your liability.  If you're in a higher tax bracket, you'll have to dig into your pocked at filing time to pay the remaining taxes due unless you had enough withheld from your job (or paid in via Form 1040-ES) to cover the total tax liability.

Note:  Since you are going back to school, you MAY qualify for one of the exceptions to the 10% penalty!  This is good news for you of course, as long as you spend the money on qualified educational expenses.  See IRS Pub 590 for more information.  Here's a link:  http://www.irs.gov/pub/irs-pdf/p590.pdf