How to Calculate the Penalty on Cashing Out an IRA
- 1). Choose an amount for your distribution. You are only taxed on amounts you actually withdraw from your IRA, so this number is the basis for all withdrawal calculations.
- 2). Determine the type of IRA you have. You can take money out tax-free from a Roth IRA as long as you have had money in the account for at least five years. For all other types of IRAs, including traditional IRAs and SEP-IRAs, your distributions will be taxable unless you contributed after-tax money to the account, which is rare.
- 3). Multiply the amount you withdraw by your marginal tax bracket, which is the rate at which your last dollar of income is taxed. Since the money you take out of your IRA will be added to the income you earn over the course of the year, your IRA money will be taxed at your marginal tax rate. Your marginal tax rate times the amount of your distribution is the amount you will owe for federal tax on your IRA distribution. For example, if you withdraw $10,000 and your marginal tax bracket is 15 percent, then the tax would amount to $1,500, since $10,000 x 0.15 = $1,500.
- 4). Multiply the amount of your withdrawal by your state marginal tax rate. If you live in one of the 41 states that have a state income tax, you will have to include the amount of your IRA distribution on your state tax return and pay the appropriate tax. Continuing the example, if your state tax is 5 percent, then the state tax would amount to $500, since $10,000 x 0.05 = $500. Added to the federal tax of $1,500 would mean a total of $2,000 in taxes.
- 5). Determine your age at the time of distribution. If you plan on cashing out your IRA before you reach age 59 1/2, you will face an IRS premature distribution penalty. The additional amount you will owe in penalty taxes equals 10 percent of your withdrawal. Continuing the example, if you are 55, then you would multiply the withdrawal amount of $10,000 by 0.1 to get another $1,000 in penalties. Added to the $2,000 in taxes would give you a total of $3,000 in penalties.
- 6). Check with your state tax board to determine if you owe an additional state early withdrawal penalty. Some states charge an early distribution penalty in addition to the IRS penalty. For example, California assesses an additional 2.5 percent penalty on pre-59 1/2 distributions. Continuing the example, if you lived in California, you would multiply the $10,000 withdrawal by 0.025 for another $250 in penalties. Added to the total in Step 5 gives you a total of $3,250, leaving you with a total of $6,750 available for you to use as you wish.
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