Do tax withholdings count as part of your inherited IRA withdrawl?

[taxamedmed]

In Schwab's web site, I withdrew 80k from an inherited IRA to be in compliance with the distribution rules. In the process of doing so, Schwab's site suggested I withhold taxes at the same time. So it sent 26k to the feds and 12k approximately to the state. So for tax purposes, I withdrew 80k from my inherited IRA? Or I withdrew $118k?  

Also the withholding amounts appear a bit excessive given W2 income of around 120k. Does it appear excessive to you?

[NCperson · Accepted solution]

@taxamedmed - the way you wrote the question is a little confusing.  but let me give it a try.

1) you withdrew $80k and of that $80k sent  $26k to the IRS and $12k to the state, leaving you with $42k.  Taxable income is $80k.   Assuming you are single, taking the standard deduction in 2023, that means you are generally in the 24% federal tax bracket, so on $80k, that is about $19.2k in federal tax, so $26k sounds "high',  I don't know what state this is, so can't state anything about that.

2) you withdrew $118k and of that $118k sent  $26k to the IRS and $12k to the state, leaving you with $80k.  Taxable income is $118k.   Assuming you are single, taking the standard deduction in 2023, that means you are generally in the 24% federal tax bracket, so on $118k, that is about $28k in federal tax, so $26k sounds "reasonable' and really "about right",  I don't know what state this is, so can't state anything about that.

I suspect #2 is really what occured because the federal tax withhiolding is more reasonable to what Schwab would have been required to withhold (22%)

[dmertz · Accepted solution]

The amount distributed for tax purposes is the total amount distributed.  That's the sum of the amount sent to you, the amount sent to the feds and the amount sent to the state.  If you received $80k, the feds received $26k and the state received $12k, the amount in box 1 of the Form 1099-R will be $118k, box 4 will be $26k and box 14 will be $12k.

The amounts withheld are apparently amounts that you asked to be withheld, otherwise the amounts would have been different.  With this $118k added to the $120k of W-2 income, the 22% withheld for federal taxes seems seems insufficient (slightly insufficient if you are married filing jointly, more so for other filing statuses).  10% withheld for state taxes seems like it might be a bit higher than necessary regardless of the state.

[fanfare]

" I withdrew 80k from an inherited IRA"

If you had tax withheld, the check or deposit sent to you will be reduced by that amount.

@taxamedmed 

[taxamedmed]

I think you #2 scenario is right. There were three entries on the inherited IRA history - 80k transfer to another account 26k Fed Withholding and 12k State Withholding. So the $118k withdrawal makes sense now with the rates you mentioned. I'm needing to do my CA health insurance exchange and need to calculate my income. So I'll need to add $118k to my income for the year, not $80. 

THANK YOU

[NCperson]

As you are in CA, the tax rate is 9.3% so under scenario #2, $12k may be slighly high, but it is reasonable.