How Do You Calculate Taxes and Penalties for Early Withdrawals From Traditional IRA Accounts?


Quick Answer

Account holders calculate taxes and penalties for early withdrawals from traditional IRA accounts by adding standard income tax plus a 10 percent penalty tax for the amount of the withdrawal, reports the IRS. The 10 percent penalty tax is waived if the withdrawal qualifies as an exception.

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Full Answer

An IRA withdrawal is considered early if it is made before the account holder is 59 1/2, according to the IRS. Funds withdrawn early and rolled over into another IRA account are not subject to income tax or the penalty tax. Early withdrawals made after the account holder has become completely disabled or has been called to active duty from reservist status for over 179 days are exempt from penalty tax. The penalty tax is also waived for distributions for medical bills that come to more than 10 percent of adjusted gross income, levies for unpaid bills to the IRS or medical insurance premiums paid during unemployment. Withdrawals to pay for higher education expenses for the account holder and the account holder's spouse, children and grandchildren are also exempt from the penalty tax.

The penalty tax is not levied when account holders withdraw up to $10,000 to buy, build or repair a first home, as reported by Bankrate. Account holders can also take out penalty-free early withdrawals in substantially equal periodic payments according to the 72(t) section of the tax code, states Kiplinger. The payments are calculated using the account balance and life expectancy of the account holder. They must last five years or until the account holder turns 59 1/2, whichever is longer.

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