First IRA Distribution Tax Questions

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El Greco
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Joined: Tue Aug 23, 2016 2:21 pm

First IRA Distribution Tax Questions

Post by El Greco »

Hi all:

I am retired and want to take my first-ever IRA distribution before the end of this year. It will be small, about 25K. Do I need to withhold taxes, or can I simply pay whatever may be due when I file my 2021 returns next year?
MrJedi
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Joined: Wed May 06, 2020 11:42 am

Re: First IRA Distribution Tax Questions

Post by MrJedi »

You can withhold, pay estimated taxes, or go for safe harbor.

If you don't do anything and wait until you file the tax return, you may be subject to underpayment if you don't meet safe harbor or have sufficient withholding from other sources.
Katietsu
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Re: First IRA Distribution Tax Questions

Post by Katietsu »

I would recommend against paying estimated taxes to avoid a penalty in your case. Using this option would require you to breakdown your income by quarter which is a hassle for most people.

Look into the safe harbor rules, especially if your income was lower in 2020 than 2021. If the safe harbor rules will not allow you to avoid a penalty, the next best option is usually to have withholding from the IRA distribution. Finally, if you do nothing, interest rates are so low, any penalty would likely be small.

If you have state taxes, often, the same options are available.
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El Greco
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Re: First IRA Distribution Tax Questions

Post by El Greco »

I can withdraw these funds from either Vanguard or Fidelity. Doing a little research it seems that they will automatically withhold 10% Federal and an amount of my choosing for state. (I am in New York state). Does this sound right?
Alan S.
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Re: First IRA Distribution Tax Questions

Post by Alan S. »

El Greco wrote: Wed Oct 13, 2021 2:08 pm I can withdraw these funds from either Vanguard or Fidelity. Doing a little research it seems that they will automatically withhold 10% Federal and an amount of my choosing for state. (I am in New York state). Does this sound right?
Yes. 10% is the default withholding rate for federal. So if you do not specify otherwise, 10% will be withheld. You can decline withholding if you don't want it, or specify a higher rate. The 10% early withdrawal penalty will apply if you are under 59.5 or do not qualify for a different penalty exception.
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