If you’ve reached or are nearing retirement, you probably want to start using the money you’ve saved in your IRA. Withdrawing money from your IRA is the easy part, but telling the IRS what you did on your taxes is a bit more difficult.
First off, getting your money is as simple as requesting a distribution request from the financial institute who manages your IRA account. Afterall, it’s your money and you can withdraw from it whenever you want. Take it too early or don’t follow the rules and you may be assessed a penalty by the IRS. On the form you need to include your identifying information, your account information and how you want to receive the money. Usually, you can receive your money via check, a direct transfer to another account or having the assets transferred to you. You’ll receive Form 1099-R the following year that will be used to account for the withdrawal to the IRS.
The next step is figuring out if you’re taking a qualified or non-qualified withdrawal. For it to be qualified with a traditional IRA, you just have to be age 59 1/2. If you have a Roth IRA, You must have had the account for at least five years and be age 59 1/2 for it to be qualified. Other ways to have it be qualified is to be permanently disabled, withdrawing from an Inherited IRA or are spending up to $10,000 for a first home. If your withdrawal is non-qualified, you’ll need to complete Form 5329 with your tax return to calculate your early withdrawal penalty.
Both types of traditional IRA withdrawals are considered taxable income and must be reported on Line 11b if you use Form 1040A or Line 15b for Form 1040. A Roth IRA is a little different since you’ve already paid taxes on the contributions you’ve made. If you’re making a qualified withdrawal or simply withdrawing contributions you’ve made, then this is not included as taxable income. If you’re taking non-qualified withdrawals of earnings, that amount comes out tax-free. However, if your distribution has any nontaxable portion, you need to reports the total withdrawal on Line 11a on Form 1040A (Line 15a on Form 1040) and the taxable portion on Line 11b on Form 1040a (Line 15b on Form 1040).
Finally, if you’re taking a taxable early withdrawal, you’ll need to fill out Form 5329 and file it with your tax return. This will figure out the 10% early withdrawal penalty you owe or tells the IRS why you are exempt from it. These exceptions include health insurance while unemployed, higher education expenses and certain medical expenses. If you qualify, you’ll need to put the exception amount on Line 2 of this form along with the code for it (which can be found in the Form instructions).
Like I said at the beginning, getting the money is the easy part. Having to fill out more IRS paperwork is not. There’s plenty of info online to help you understand the procedures. Refer to IRS Publication 590 to help get you started. If you need further assistance, the tax experts at the IRA Financial Group are waiting to help you. Visit their website here or give them a buzz at 800.472.0646.