If I do not have a job (thus no W-2) during the tax year that I withdraw from my traditional IRA, then do I not need to pay income taxes on my withdrawals?

[tk01kj]

Say I decide to retire at age 53 and withdraw at the earliest date I can from my traditional IRA, which is 55. I do not have a W-2 that year, no taxable wages. Then do I not need to pay money when I withdraw from my traditional IRA (since no income taxes that year)?

[SweetieJean]

Whether you have a job or not is irrelevant.  Income other than wages can still be taxable.

[dmertz · Accepted solution]

Your distribution would be subject to at least the 10% early-distribution penalty.  Whether or not the distribution would be subject to income tax would depend on whether the distribution (plus any other taxable income) exceeded your standard deduction or itemized deduction.

The earliest age that you can withdraw from a traditional IRA without penalty (unless you have another penalty exception) is age 59½.  The age-55 exception only applies to distributions from qualified retirement plans like a 401(k) and only if you separate from service in or after the year you reach age 55.

If you are willing to pay the tax and, prior to age 59½, the penalty, you can withdraw from a traditional IRA whenever you want.  For a qualified retirement plan, if you have separated from service with the company you can withdraw from the plan whenever you want and pay the tax and penalty.

[tk01kj]

Sorry, I meant if I stop working at age 56 and decide to withdraw my money from traditional IRA at age 60. Those four years I do not have income so no W-2. Then I am not subject to penalty and not subject to income tax?

Then if this is the case, why do people contribute to a Roth IRA when they can withdraw from their traditional IRA during a year that they do not have income, thus no income taxes?

[macuser_22]

Withdrawing from a Traditional IRA *IS* income subject to tax if over the minimum filing requirements.   Withdrawing from a Roth is *not* taxable income after retirement age (59 1/2) and the 5 year Roth ownership limit has been reached.

Depends on your total taxable income for the year and what the filing requirement will be four years from now.  As of now if your gross income exceeds $10,400 (for single - other filing statuses are different) then you must file and would pay some tax.

[rjs]

The key point is that an IRA withdrawal is always "subject to income tax." It makes no difference whether or not you have W-2 income in the same year. The IRA withdrawal is always taxable income. Whether you actually have to pay any tax on it depends on how much you withdraw and how much other income you have, of any kind, not just W-2 income. If the IRA withdrawal is large enough you will have to pay tax on it even if you have no other income at all. Not having W-2 income does not mean that you don't have to pay tax on the IRA withdrawal.

[dmertz]

Certain states might not tax the traditional IRA distributions, but that's separate from the tax treatment on your federal tax return.

[tk01kj]

Lets say when I withdraw from my traditional IRA, I am age 60, head of household, married filing jointly or whatever the norm is then. I have no income that year I withdraw, and I withdraw $40000 over the span of a year. Essentially then this $40000 gets taxed at normal income tax rates?

[fanfare]

You discovered the obfuscated disadvantage of IRA investing. When the money comes out, the taxes are high.

[dmertz]

Traditional IRAs are tax-*deferred* savings, savings that are includible income when distributed.  IRA distributions are taxable as ordinary income.

The $40,000 traditional IRA distribution is included in your Adjusted Gross Income on your federal tax return.  Your AGI is then reduced by either the standard deduction or your itemized deduction to determine your taxable income.

[VolvoGirl]

If you are married you file a Joint return, not Head of Household.  Does your spouse have any income?  And there are other kinds of taxable income not just W2 wages.  Do you have any interest or dividends?  Oh, if you retire then how about any retirement income or Social Security?  

[macuser_22]

Pension income and Social Security income can be taxes form 0-85% depending on other income.   Your spouses income and Social Security, if any, are included on the total AGI to determine the taxable income.

Filing married separate returns would probably result in a higher overall tax and all Social Security becomes taxable.  

[SweetieJean]

To clarify: Up to 85% of your Social Security benefits are taxable. Up to 100% of your pension is taxable.

[tk01kj]

What social security benefits? I don't work a government job and it seems my retirement money is coming from 401k. And plus this is potentially 10 years from now and possibly the laws will change

[xmasbaby0]

If you happen to be receiving Social Security Disability benefits, those benefits can be taxable along with your 401k distributions.  If you are not receiving any SS yet, that answer does not have to worry you.