Can I Deduct an IRA Withdrawal Penalty?
Original post by Allison Westbrook of Demand Media
An IRA is tax-sheltered savings account designed help your retirement nest egg grow throughout your working years. In order to reap the tax benefits of the account, you must wait until age 59 1/2 before taking distributions. Doing so before then could forfeit your tax benefits and provoke a tax penalty of 10 percent of your withdrawal amount. Because you pay the penalty to the IRS, it is deductible on your federal income taxes.
The type of IRA you have and your age determine whether or not you will pay a penalty on a withdrawal. Withdrawals on both traditional and Roth IRAs after age 59 1/2 are penalty-free. Withdrawals on traditional IRAs prior to 59 1/2 always incur penalties, and Roth IRAs have more complex rules. The portion of your Roth IRA that you contributed directly to is eligible for withdrawal without a 10 percent withdrawal penalty. However, any earnings you have in a Roth that you choose to withdraw prior to age 59 1/2 will incur a 10 percent early withdrawal penalty.
If you incur a penalty on your IRA withdrawal, your banking institution will report the penalty to you in Box 2 of Form 1099-INT. When you file your federal income taxes, you'll report this amount on Form 1040 where is asks you about penalties on early withdrawal of savings. The location of this question on Form 1040 may change year to year, but for the 2010 tax year, it is on line 30. The amount of your withdrawal penalty will lower your taxable income for the year.
The 10 percent early withdrawal penalty isn't the only expense you'll incur when you make an early withdrawal from your IRA. The amount of your withdrawal is still subject to the appropriate federal income taxes. The distributions you take from your IRA count as taxable income, with the exception of money on which you have already paid taxes. For example, your contributions to a Roth IRA are taxable, meaning that once you withdraw the money, the contributions are not subject to federal income tax.
If you are in a pinch for short-term cash that you'll be able to pay back soon, consider taking an IRA loan. You can legally make a temporary withdrawal of the money in your IRA without incurring any taxes or penalty fees. However, you must completely replace the money within 60 days to take advantage of this provision. Furthermore, you cannot borrow from your IRA more than once per year.
- Bankrate.com; "Penalty on Withdrawal from Roth IRA?; George Saenz; January 2011
- Smart Money; Tapping Your IRA Penalty-Free; July 2010
About the Author
Allison Westbrook is an experienced writer of three years with a passion for creating relevant articles for a wide readership. She attended Kilgore College and majored in English. Allison's articles have appeared on such websites as eHow and Trails.com. Her reflective writing angles deliver focused and consistent content.