{"id":4254,"date":"2022-06-03T01:00:00","date_gmt":"2022-06-02T19:00:00","guid":{"rendered":"https:\/\/afinancehub.com\/?p=4254"},"modified":"2022-12-05T17:58:21","modified_gmt":"2022-12-05T11:58:21","slug":"how-can-i-avoid-paying-taxes-on-my-ira-withdrawal","status":"publish","type":"post","link":"https:\/\/afinancehub.com\/how-can-i-avoid-paying-taxes-on-my-ira-withdrawal.html","title":{"rendered":"How Can I Avoid Paying Taxes on My IRA Withdrawal"},"content":{"rendered":"\n

Avoiding taxes on IRA withdrawal requires you to be smart and plan ahead. Being strategic right from when you start planning your retirement is a smart move. This is because some plans are better than others when it comes to how taxes are applied.<\/p>\n\n\n\n

For example, opening a Traditional IRA will cost you pre-tax dollars, meaning, you will pay the tax when you withdraw the funds. Something that you wouldn\u2019t have to worry about when you open a Roth IRA, as this is funded with your after-tax dollars so you wouldn\u2019t have to pay any taxes when you withdraw the money.<\/p>\n\n\n\n

Roth IRA vs. Traditional IRA<\/h2>\n\n\n\n

The biggest difference between these two is how taxes are applied. Avoiding taxes on IRA withdrawal means Roth IRA is your best option. This is because your contributions are not deductible and retirement withdrawals are tax-free.<\/p>\n\n\n\n

On the other side, contributions are tax-deductible for traditional IRAs, as well as retirement withdrawals.<\/p>\n\n\n\n

Except for taxes, check out the table below for more comparison of the two options;<\/p>\n\n\n\n

Roth IRA<\/th>Traditional IRA<\/th><\/tr><\/thead>
You can withdraw anytime without worrying about taxes and penalties<\/td>You can discontinue depending on your income<\/td><\/tr>
You can only discontinue your contributions at higher income<\/td>Tax payment on your retirement distribution applies as on ordinary income<\/td><\/tr>
Once your withdrawals are qualified, they are tax-free<\/td>You have to make Required Minimum Distributions at age  72<\/td><\/tr>
You can withdraw your contributions (not earnings) early, without being charged any penalties<\/td>Early withdrawal will cost you a 10% early withdrawal penalty, as well as taxes<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

How Can You Avoid Paying Taxes on My IRA Withdrawal<\/h2>\n\n\n\n

As seen in the table above, you don\u2019t have to worry about an early withdrawal penalty if you save with a Roth IRA, while on the other side, you must incur a 10% early withdrawal penalty for withdrawing early on a Traditional IRA account.<\/p>\n\n\n\n

\"IRA
Avoiding taxes on ira withdrawals<\/figcaption><\/figure>\n\n\n\n

However, depending on the circumstance as to which you are making an early withdrawal, you might be able to avoid withdrawal penalties, even though tax charges may apply depending on the situation. This includes;<\/p>\n\n\n\n

1) Purchasing a Home for the First Time<\/h3>\n\n\n\n

You can withdraw up to $10000 early, and put it towards purchasing your first home.<\/p>\n\n\n\n

2) Educational Expenses<\/h3>\n\n\n\n

Some educational expenses are eligible. But this may only be used on yourself and\/ or immediate family members.<\/p>\n\n\n\n

3) Disability<\/h3>\n\n\n\n

Penalty-free early withdrawals are accepted if you are disabled.<\/p>\n\n\n\n

4) Death<\/h3>\n\n\n\n

If you pass on, your beneficiaries will not incur any penalties for withdrawing early from your IRA account.<\/p>\n\n\n\n

5) Medical Expenses<\/h3>\n\n\n\n

Unreimbursed medical expenses are eligible for penalty-free early withdrawal. Note that the expenses must be above 7.5% of your AGI (Adjusted Gross Income).<\/p>\n\n\n\n

6) Birth or Adoption Expenses<\/h3>\n\n\n\n

If you become a new parent and the funds are meant to pay for your adoption or birth expenses, you can withdraw up to $5,000 from your retirement account without incurring an early withdrawal penalty.<\/p>\n\n\n\n

7) Health Insurance<\/h3>\n\n\n\n

You can withdraw your retirement funds early to pay for your, your spouse\u2019s, or dependant\u2019s health insurance, only if you have been unemployed for 12 weeks and more.<\/p>\n\n\n\n

8) Periodic Payments<\/h3>\n\n\n\n

This means making an arrangement to receive your money on a regular schedule.<\/p>\n\n\n\n

9) Involuntary Distribution<\/h3>\n\n\n\n

If the distribution is caused by an IRS tax levy, you can always claim a penalty exception as on IRS Form 5329<\/a>.<\/p>\n\n\n\n

10) Reservist Distribution<\/h3>\n\n\n\n

If you are a member of the National Guard or a Reservist, you are eligible for a penalty-free early distribution if you have to be on active duty. Some rules and restrictions apply.<\/p>\n\n\n\n

Other Strategies for Avoiding Taxes On IRA Withdrawal<\/h2>\n\n\n\n

There are other ways you can go about avoiding taxes on IRA withdrawal or reducing them. Some of them include;<\/p>\n\n\n\n