The IRS provides a detailed set of instructions regarding taxes and penalties on IRAs in its Publication 590. The State of California imposes its own taxation and penalty rules regarding IRAs that generally follow the IRS model. Generally speaking, IRA distributions are taxable on a federal and state level, and distributions before retirement age may subject you to additional penalties.
An IRA is a personal retirement account, unlike other types of retirement plans that are typically sponsored by companies or governmental units. As an IRA owner, you are in control of your account. While you may have to make a case for a hardship distribution to get money out of your 401(k) plan, you can take a distribution from your IRA whenever you want and for any reason. However, if you live in California, you may be subject to both state and federal penalties and taxes.
When you take a distribution from an IRA in California, you must include the amount of the withdrawal in both your federal and California income. The firm that issues your IRA distribution will also send you a Form 1099-R, showing the amount of the distribution. You must first include this amount on your federal tax filing form. On California Form 540, the California Resident Income Tax Return, the amount of the distribution will be part of the federal adjusted gross income figure that you transfer from your federal return to line 13.
Certain distributions from IRAs are subject to additional penalties. If you take an IRA distribution before you reach age 59-1/2, California considers that an early distribution. In addition to any income taxes, you must pay the State of California a 2-1/2 percent penalty tax on the distribution.
Federal Taxes and Penalties
The State of California generally follows federal tax policy regarding IRA distributions, meaning if you pay California taxes or penalties, you will typically owe federal amounts as well. Most IRA distributions are fully taxable at ordinary income rates at the federal level. Additionally, premature distributions incur a 10 percent federal penalty. All federal taxes and penalties are in addition to state amounts.
Roth IRAs are a special type of IRA that generally offer tax-free withdrawals. As long as you keep your money in a Roth for at least five years after you open it and take your distributions after the age of 59-1/2, most Roth distributions are tax- and penalty-free. This applies to both federal and California taxes.
- State of California Franchise Tax Board: Additional Taxes on Early Distributions (PDF)
- State of California Franchise Tax Board: California Resident Income Tax Return Form 540 (PDF)
- Internal Revenue Service: Publication 590 -- Are Distributions Taxable?
- Internal Revenue Service: Publication 590 -- Early Distributions
- Internal Revenue Service: Publication 590 -- Are Roth Distributions Taxable?