If I withdrew from my IRA early, I know I would face at least a 10% penalty. Is income tax due as well? How would that work for a homemaker/housewife?

[VolvoGirl]

You will get a 1099R for it.  

You didn't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½).  You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The gross amount shows up,on 1040 line 4a and the taxable amount on 4b.  The withholding will show up on 1040 line 16.

It has to break out and show the 10% penalty separately on your return, (Schedule 4 line 59 which goes to 1040 line 14)

Then you get credit for all the withholding taken out on 1040 line 16.

And by increasing your income you may have lost some credits like the EIC .  You can lose like up to 50% of it for taxes and penalties for federal and state.

[macuser_22]

What type of IRA?  Roth or Traditional?

Unless you have any after-tax "basis" in a Traditional IRA then all of the distribution would be taxable as ordinary income, but you can always withdraw any or all of you own prior contributions form a Roth IRA tax and penalty free - only the earnings are taxable.

[TomD8]

To answer your original question, the 10% early withdrawal penalty is over and above any income tax due.

[ctrayford]

Yes thank you. I am aware. I have an IRA from when I worked in healthcare for several years. Now I mainly stay home and is the reason for my inquiry regarding the income tax.

[hjhood]

My age 78.  April 2020 I (without any knowledge) unintentionally took $27,000 out of my traditional  IRA and transferred it inside Regions to a CD; effectively canceling the IRA.  In the previous ten years or so I have used this IRA account to withdraw all IRA RMDs.

I am doing my TurboTax and discovered there is now a penalty of 50%.  I have talked with the bank and because of their 60 day 'fix it rules' they cannot fix/advise/help.  They suggested talking to a Tax Advisor.

Perhaps in part, a partial resolution is to go ahead and take the $11,000 I would have normally taken out of the $27k - and suffer the $6,000  balance in a 50% penalty.  Can this penalty be carried forward and usefully utilized in some way; ie, as a down payment on next year's taxes?

Is there an IRS document that gets me out of this dilemma?

[VolvoGirl]

I don't understand why you have a penalty? Is it a bank penalty or IRS penalty?   If you took it all out that would have been more than the RMD.  You don't pay a penalty for closing an IRA if you are over 59 1/2.  Or do you just mean the regular tax on it was a big increase?  @dmertz 

[macuser_22]

---

@hjhood wrote:

My age 78.  April 2020 I (without any knowledge) unintentionally took $27,000 out of my traditional  IRA and transferred it inside Regions to a CD; effectively canceling the IRA.  In the previous ten years or so I have used this IRA account to withdraw all IRA RMDs.

I am doing my TurboTax and discovered there is now a penalty of 50%.  I have talked with the bank and because of their 60 day 'fix it rules' they cannot fix/advise/help.  They suggested talking to a Tax Advisor.

Perhaps in part, a partial resolution is to go ahead and take the $11,000 I would have normally taken out of the $27k - and suffer the $6,000  balance in a 50% penalty.  Can this penalty be carried forward and usefully utilized in some way; ie, as a down payment on next year's taxes?

Is there an IRS document that gets me out of this dilemma?

---

You simply misunderstood the question in TurboTax.     There is no penalty.    Delete the 1099-R and re-enter.

The question is was all the 2020 RMD received.  Since it no only met that requirement you far exceeded it.  so answer the RMD questions that it was all a RMD and you received the 2020 RMD.

In addition, since the CARES Act waived the 2020 RMD requirement for IRA's, you did not need to take the RMD at all so the questions can also be answered that "none of this distribution was a RMD" and "RMD not required" because it actually was not a RMD at all in 2020.

[TomD8]

@hjhood --

A 50% penalty would apply only if you failed to take a required RMD.  If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.  

[hjhood]

Volvo Girl - I have probably misinterpreted the TTx question. I'll go back again for the umpteenth time.  I am now probably more afraid of the increased federal tax I have inadvertently created for myself!  I'll get back if I still have a Qs.  Thx Jim

[hjhood]

TomD8 - I knew about the 50% penalty as it relates to "No Withdrawal".  I guess what throws me is the idea that I blindly canceled the IRA in favor of a better performing CD.  It's the IRA I needed to take additional (years forward) RMDs from higher $$ performers.  I'll go back and retrace my steps.  I understand now how this blind move I made will affect my federal taxes.  Yikes!  Thx Jim

[hjhood]

Macuser -  Got it!  I'll go back and review the entries.  The end result is the $27k is added to my income and taxes will now be adjusted accordingly.  Had I not canceled the IRA I could have 'banked' the balance and used it again next year.  Could this $27k windfall be stretched out over a few years someway?  Thx Jim

[macuser_22]

---

@hjhood wrote:

TomD8 - I knew about the 50% penalty as it relates to "No Withdrawal".  I guess what throws me is the idea that I blindly canceled the IRA in favor of a better performing CD.  It's the IRA I needed to take additional (years forward) RMDs from higher $$ performers.  I'll go back and retrace my steps.  I understand now how this blind move I made will affect my federal taxes.  Yikes!  Thx Jim

---

There are two RMD questions in TurboTax.   The first one is in the first part of the 1099-R interview. the 2nd one is after the 1099-R summary screen.   It is the 2nd question that will apply the 50% penalty only if you say the RMD was not all taken.

(Do not confuse the penalty with the normal tax on the distribution that is taxed as ordinary income at your margional tax rate).

As I said above:  delete the 1099-R to reset everything, then re-enter it.

[macuser_22]

---

@hjhood wrote:

 Could this $27k windfall be stretched out over a few years someway? 

---

Not unless it was a qualified COVID related distribution  in one of the following ways - (if it was then the tax can be paid over 3 years.)

You are a qualified individual if –

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

[hjhood]

It was my wrong headed thinking . . .

I am now on to it!  I've got to get in my head the idea is to 'bank' the IRA as long as possible. My error was in canceling the IRA exposing me to an escalated tax rate; more taxes - not considered a penalty.  Thx Jim