The taxation of IRA distributions depends on the IRA owner’s age, what the distributions are used for and their tax-deductibility treatment. As a rule, most distributions are taxed as income, and distributions before age 59 ½ receive a 10 percent penalty unless they are used for one of several specific purposes, states Investopedia.
Distributions received before age 59 ½ are subject to a 10 penalty plus income tax, but no penalty is applied if the contributions are used for certain purposes defined by the IRS and specific criteria for that purpose are met, Investopedia explains. These purposes include paying for qualified higher education expenses, purchasing a first home, paying an IRS levy, and paying non-reimbursed medical expenses and medical insurance. No penalty is assessed, under specific conditions, if distributions are made to an IRA beneficiary (not the owner), if they are part of a SEPP program, or if the IRA owner becomes disabled before age 59 ½.
Distributions after age 59 ½ are taxed as income, but carry no penalty. Amounts to which income tax does not apply do not receive a 10 percent penalty either, reports Investopedia. Those amounts include distributions of non-deductible IRA contributions, amounts exceeding the IRA contribution limit in a given year, and distributions placed into the IRA as part of a rollover (provided they are placed within the 60-day limit).