Let’s say I have $100K in an IRA account (wishful thinking). What will be the tax consequences for this year if I withdrawl $50K? I somewhat know how a total withdrawl would be taxed, is a partial withdrawl taxed any different? Will I be able to replace that $50K sometime later?
If you were to withdraw $50k you would have taxes withheld at 20%. So you would recieve $40,000. You would then be responsible for taxes on $50k for that tax year. This is not a good thing, because you will likely be pushed into a higher tax bracket by the substantial extra income.
You could replace the funds in whole or in part within sixty days. So, for example, if you needed money short term while waiting for other funding to come through you could replace it. You would have to make up the $10k of withheld tax though if you did that.
Partial payments are generally treated like full withdrawals with few exceptions. You can choose not to have tax withheld on periodic payments made over a long period of time. Even then, you have several requirements you must meet.
Hope that helps.
Thanks very much fruitbat, that saves me a lot of time searching through (and misinterpreting) the code.
If I understand correctly, there is a 10% penalty for early withdrawal, so I would have to pay $5K in penalties plus add the $50K to my income for the year, and then pay the “normal” tax on my AGI. Is that right?
I always thought it to be 10% also. . .
I believe they withhold 20% when you make the withdrawal, so Uncle Sam will be happy. 10% will be the penalty you have to pay and 10% will be withholdings towards the current year’s tax liability.
The 10% penalty for early withdrawal goes to the bank. The 20% tax withholding goes to Uncle Sam. The banking regulations that created CD’s and IRA’s require the banks to maintain a higher reserve for those type accounts in exchange for paying higher interest rates. The early withdrawal punative penalty is allowed to help enforce the longer term of time deposits. It can be waived by the bank and always is in some cases, like the death of the account holder. Getting the bank to waive the early withdrawal penalty for “ordinary” reasons will be supremely difficult.
Upon taking a taxable distribution from an IRA, 20% will be withheld and paid to the federal government. Depending on the state you live in, state withholding may be required as well.
If you are under age 59 1/2, a 10% excise tax generally applies. There are some exceptions for tuition, medical expenses and first time home purchase. See IRS Pub. 590, page 49. Link below to PDF.
The excise tax is paid by you when you file your taxes, so make sure you have the cash on hand for the big tax bill at the end of the year.
I didn’t originally mention the 10% because it is a penalty, and thus is not applicable to everyone. If you are under 59 1/2 and you do not meet one of exceptions you will owe a ten percent penalty in addition to ordinary income taxes. The twenty percent which is withheld is for the ordinary income tax.
Doctor Jackson is factually incorrect on this one. The ten percent goes to the IRS. It has nothing to do with bank reserves unless there is an awfully convincing cite out there. Penalties exist so the government can encourage desirable behavior (saving for retirement) and discourage undesirable behavior (spending your retirement money early).
It is not up to the financial institution as to whether the penalty is waived. When you file your taxes you will have an opportunity to claim exemption to the penalty if you qualify.