I am a NY resident who is considering a lump sum cash out of a $12,000 Fidelity IRA. How much of that money should I plan on setting aside for taxes?

[SteamTrain · Accepted solution]

That depends entirely on your age and what other income you have during 2017.

If you are under age 59.5, the IRA may be required to withhold 30% (3600) as 20% + 10% penalty, when they send it to you.  BUT...that doesn't mean that's all you will owe for it.

THe entire 12,000 will be added to your other income at tax time, and the $$ withheld will be entered as a credit against what you might owe on ALL your income.  If they withheld too much, then you'll get some of it as a refund....if your other income puts you in a tax bracket that is higher, then you'll owe some more.

If they give you the choice to withhold or not, then guestimate the highest tax % you will be subject to for 2017, and have them withhold that.  25% is a good seat-of-the-pants amount if you are over 59.5...add another 10% if you are younger.

For state taxes , you'll need to guestimate what NY tax bracket you will be in when you file for 2017 taxes, and ask Fidelity to withhold that % for NY.

[dmertz]

The only federal withholding requirement of the IRA custodian is that they must withhold 10% of the taxable amount unless you specify that nothing be withheld or that more than 10% be withheld.  Some states also have withholding requirements.  But, as SteamTrain said, you should plan on the $12,000 be added to your income subject to ordinary income taxes and, if under age 59½, an additional $1,200 for the 10% penalty.

For example, if this $12,000 is your only income and you are over age 59½, your tax liability will be zero and you could request the nothing be withheld for federal taxes.  If instead this income falls in the 39.6% tax bracket due to you having a large amount of other taxable income and you are under age 59½, you might want to request that 50% be withheld for federal taxes.