I don’t remember grammar school math. Here is the problem. Please show your work so I can remember.
I need to withdraw money and net $15K. I need to withdraw enough to cover 20% of that $15k in taxes. How much do I need to withdraw?
Is it 20% of $15k = $3k so I need $18k?
0.8 * withdrawn = $15,000
withdrawn = 15k / 0.8
withdrawn = 18,750
Assuming you messed up “I need to withdraw enough to cover 20% of $15k.” Because yes, that’s just calculating 20% of 15k.
If you literally mean you need to cover 20% of the $15K in taxes, you’re right. But I suspect you mean you need to cover 20% of the amount withdrawn. In that case then Snaky_Kong is right.
It’s bad that I cannot explain what I need! Snarky_Kong is right. The feds are going to take 20% of whatever I draw, so how much do I need to take out to net $15k?
Snarky_Kong gave you the answer: You withdraw $18,750. The government takes 20% of that which is $3,750 which leave you with $15,000.
I was restating the question, which Snarky_Kong answered. Now I have the formula.
I just want to say that it does my heart good to see that I’m not the only one who is occasionally stopped cold by the inability to come up with a simple math formula. We should have remedial math classes for adults who’ve been out of the classroom too long!
In the spirit of “show your work”, it may or may not be helpful here to work through the algebra a bit more completely.
You need to withdraw x, where
x - 0.2x = 15,000
so, working through and solving for x:
x (1 - 0.2) = 15,000
0.8x = 15,000
x = 18,750
Problems involving percents aren’t really difficult, but they are tricky and easy to get wrong, because you have to pay attention to what you’re taking a percentage of.
Problems involving percentages are also tricky because they are not reversible. If you start with 100 and add 50% you get 150. If you then take 50% away again you end up with only 75, not 100. But if you do it the other way around, first substracting and then adding, you get the same result.
I cannot count the number of Vice Presidents and Director of Finance I have had the misfortune of working with who cannot convert the following statement to a percentage increase:
“We had Sales of $15.0 million which was $3 million higher than the previous year”
Most of the time they will get 20%, when it should be 25%.
I have seen this mistake literally hundreds of times by people earning more than a quarter million a year presumably in part due to their financial acumen.
Right, and that’s exactly because you’re taking percents of different numbers each time. One example I like to use is:
Suppose your boss says to you: “I’m going to have to give you a 50% pay cut, but to make it up to you I’ll immediately follow it up with a 60% raise. Is that okay with you?”
On the off chance there’s more behind the question the OP asked …
You’d only need to pay taxes on a withdrawal if the money is coming from a traditional (= not Roth) IRA or 401K. And if the withdrawal is not being moved into a different IRA or 401K.
Even then, you do not need to send the IRS their cut at the same time. You can choose to wait and pay them next April15th in 2025 when you file your 2024 income taxes. Or you could pay them any time between now and then. You might owe a smidgen of interest if you waited another 14 months to pay, but depending on what the money is invested in, you might do better leaving the money for taxes inside the account between now and then.
There’s really no excuse for this kind of mistake, but one can see the origin of it, and it’s a little like those mathematical word games phrased as trick questions. The problem is that people tend to focus on the numbers that are explicitly presented rather than bothering to comprehend the words. Or IOW, a key number here, “[sales in] the previous year” is presented as a non-numeric descriptor so there’s a tendency to gloss right by it. Although you’d certainly think that a finance person who is supposed to be good with numbers would know better!
Related to this, most financial modeling starts with an assumption of lognormal returns, rather than normal.