Can I Avoid Paying Taxes on an IRA Withdrawal?
Original post by Jane Meggitt of Demand Media
To avoid paying taxes on an Individual Retirement Account withdrawal, choose a Roth IRA, if eligible. Traditional IRAs, while tax-deductible on federal income-tax returns if meeting certain requirements, are tax-deferred and withdrawals are taxed as ordinary income. Roth IRA contributions, made with after-tax dollars, are tax-free at withdrawal if the account has been open a minimum of five years.
While contributions to a Roth IRA are not deductible, this type of account has several advantages. While the minimum age to for account distributions is 59 1/2, unlike a traditional IRA there is no mandatory age at which distributions must be taken. Roth IRA investors do not ever have to take distributions. Also unlike traditional IRAs, Roth IRA owners may continue to contribute to the accounts past the age of 70 1/2, as long as there is earned income. Because there are no mandatory distributions, Roth IRAs may be used for estate-planning purposes to leave assets tax-free to heirs.
Maximum Annual Contributions
For both traditional and Roth IRAs, the maximum annual contribution at the time of publication is $5,000 for taxpayers age 50 and under and $6,000 for those over the age of 50, assuming at least that much was earned in compensation. While anyone with earned income may contribute to a traditional IRA, even if the adjusted gross income (AGI) is too high to make a deduction, only those meeting certain AGI limits may contribute to Roth IRAs.
Adjusted Gross Income
In 2011, the AGI limit for a single filer to contribute the full amount to a Roth IRA is under $107,000. Between $107,000 and $122,000, partial contributions are allowed. For married couples filing jointly, the AGI limit for a full contribution is under $169,000. If the AGI is between $169,000 and less than $179,000, partial contributions are allowed.
The IRS levies a 10 percent penalty on early Roth IRA withdrawals, and taxes withdrawals along with the penalty for withdrawals from traditional IRAs. In certain circumstances, the additional penalty is not charged. This includes withdrawals of up to $10,000 for expenses relating to a first home purchase; payments of medical expenses above 7.5 percent of the annual AGI; higher-education expenses for the account owner, spouse or children; and the total and complete disability of the account owner.
- Internal Revenue Service: Roth IRAs
- Internal Revenue Service: Publication 590 (2010), Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: 2011 IRA Contribution and Deduction Limits
About the Author
Jane Meggitt has been a writer for more than 20 years. In addition to reporting for a major newspaper chain, her work has appeared in "Horse News," "Suburban Classic," "Hoof Beats," "Equine Journal" and other publications. She has a Bachelor of Arts in English from New York University and an Associate of Arts from the American Academy of Dramatics Arts, New York City.