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Early IRA Withdrawals LifeBack Tax
You may find yourself owing back taxes to the Internal Revenue Service if you withdraw funds from your IRA (individual retirement account) before retiring. How much you owe in taxes depends on whether you have a traditional IRA or a Roth IRA, and the circumstances of your IRA withdrawal.
If your IRA is a traditional IRA, you will owe income tax on any distributions from that account. Similar to a 401K plan, traditional IRA contributions are tax deductible, while traditional IRA distributions are taxable income. Essentially, funds placed in a traditional IRA don't get taxed until you take them out. These funds get taxed at the rate and bracket for when you withdraw them, so you could end up losing more of your IRA funds to the IRS if you take a distribution while still earning employment wages.
This does not apply if you have a Roth IRA. Funds going into a Roth IRA get taxed before depositing, so you normally don't owe income tax on Roth IRA distributions. Additionally, any capital gains from your Roth IRA investments are also exempt from income tax.
The Internal Revenue Service also collects a 10 percent penalty tax on early distributions from an IRA or other retirement account before the age of 59 1/2. This applies to both traditional and Roth IRA accounts, so while you won't owe income tax on an early Roth IRA distribution, you could still end up owing the IRS a hefty tax penalty.
Depending on your circumstances, you may be able to circumvent the 10 percent penalty when pulling funds from an IRA. For a traditional IRA, if you withdraw a contribution before your tax return filing deadline, the funds are taxed normally as earned income and you won't owe early-withdrawal penalties. For a Roth IRA, the early penalty only applies to investment gains, so if you only withdraw the funds you originally contributed, you won't owe penalties.
Should you find yourself in deep water with the IRS due to taking early IRA distributions, we at LifeBack Tax are here to help. We are professional tax experts and can stop the IRS from seizing your house, wages, or bank accounts. We specialize in assisting taxpayers against the government, and will negotiate with the IRS to quickly resolve your tax issues.
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