What are the IRS penalties for taking money from an IRA?

A 10% penalty for taking distributions prior to age 59 ½.

  1. Waived if the distribution is from an account you inherited.
  2. No penalty for distributions of contributions to a Roth.
    1. Penalty will apply to a distribution of earnings, however.
  3. Avoided if you take a series of “substantially equal payments” from the IRA and maintain those annual distributions until age 59 ½ AND for at least a minimum of 5 years.

Do I pay taxes on distributions?

  1. Generally, yes. Taxes will be at ordinary income tax rates.
    1. You cannot deduct losses from your IRA investments, nor utilize capital gain tax treatment.
  2. EXCEPTIONS:
    1. You never pay taxes on Roth contributions.
    2. Earnings on Roth contributions are exempt from taxation if the distribution is qualified: To be a “qualified distribution”, you must meet BOTH of the following conditions:
      1. You are age 59 ½ or older.
      2. You have had the Roth IRA account for at least 5 years.
    3. Non-deductible IRA contributions are not subject to taxation.
    4. Unlike a Roth contribution, when taking a distribution, only a portion of your distribution will be considered a return of non-deductible IRA contributions.