Tax Rules IRA Distribution

March 9th, 2008

The IRS’ tax rules on IRA distribution vary according to the type of IRA you have and the type of IRA distribution you make. Below are the tax rules for IRA distribution from a Traditional IRA and a Roth IRA. For tax rules of Roth IRA Distributions, see Roth IRA Distribution Rules.

Traditional IRA distribution tax rules

Traditional IRA Distributions must be made by April 1 of the year following the calendar year when you reach age 70 1/2 even if you are still employed.

What are the additional taxes and penalties for Traditional IRA?

You are subject to additional taxes and penalties for:

Excess contribution (contribution to the Traditional IRA more than is allowed) are subject to a 6% tax

Early withdrawals or premature distributions (making withdrawals before age 59 1/2) are generally subject to additional 10% tax unless exceptions apply

Excess accumulation (not withdrawing enough funds after age 70 1/2) are subject to a 50% excise tax on the amount not distributed as required.

Generally, you must use the Form 5329 to report the tax on excess contributions, premature (early) withdrawals or distributions and excess accumulations. Attach the tax form 5329 to Form 1040 and enter the total amount of additional tax due on line 60 of the form 1040.

Tax Rules IRA Distribution

Tax rules on converting Traditional IRA to Roth IRA

You can convert a Traditional IRA to a Roth IRA. This will be treated as a taxable distribution but not subject to the 10% additional tax (regardless of age). Any part of the conversion from a Traditional IRA to a Roth IRA that represents your basis is not taxable. Box 7 of Form 1099-R will generally show code “2″ for the traditional to Roth conversion.

IRA Rules