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Author: stocks2grow Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: How does early IRA withdrawal work? Date: 2/24/2009 8:15 AM
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Aside from the opinions about the wisdom in doing this, I am interested in the mechanics...

If you have to remove (all or some) shares from a mutual fund IRA before the mandatory age to start ("early withdrawal"), how does that work as far as taxes and penalties? As I understand it:
1. a Roth IRA has taxes paid up front and principle grows tax free, plus no taxes on withdrawal
2. A Traditional IRA, you get a tax deduction for contributing, the principle grows tax free, and you pay income tax on the amount withdrawn.

So, can you help with these?

A. it appears that in neither case do you pay captial gains taxes, or could you claim losses - correct?
B. I assume income tax only applies to the Traditional IRA (and only for the part you claimed in the past as deductible (per the Form 8606))
C. Say you had an IRA worth $100,000 and you cashed it out early. Would you pay income tax on a $100,000 tax bracket (separately from your other income), or on your total income for the year (which now includes the IRA amount)?
D. When does the 10% penalty get accounted for; from what's left after you pay the taxes, or (in this example) a straight $10,000?

Thanks,
Mike
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