I'm going to withdraw from my Roth IRA. I know there's a 10% penalty. what is the % I need to withhold for state & federal before making my withdrawal? I live in Utah.

[dalocalsiren]

I am under the age of 59.5. I have spoken to a rep about this. I was told that I am eligible to withdraw 1200 without penalty because that is the amount I contributed. However, I need to withdraw more than that, so I am aware that I will get hit with the 10%.
However, upon making the amount I need to withdraw, I went on the second of my fidelity and it's asking me how much I would like to withhold for State and how much would I like to withhold for Federal.  my options were 0% and custom %.
I'm not sure how much I'm supposed to do for each. I do live in Utah and I am not currently working and I'm not retired either.  Fidelity is not authorized to give out tax advice so I am here hoping someone will help me with this. Thank you in advance.

[Anonymous_]

I will page @dmertz

[dmertz · Accepted solution]

Since you say that you need to withdraw more than your contribution basis and the amount that you withdraw in excess of your contribution basis will be subject to a 10% early-distribution penalty, I'll infer that the need to obtain a distribution has nothing to do with an excess contribution.

The amount that you want to have withheld for taxes depends on your objective.  Objectives would be to avoid underpayment penalties, to avoid having to pay more with estimated tax payments or a balance due on your tax return, or to avoid needing to annualize income on Schedule AI of Form 2210 to eliminate an underpayment penalty for earlier tax quarters.

Only the amount that you withdraw in excess of your $1,200 of contribution basis is subject to tax and, assuming no Roth conversion basis, only taxable amounts are subject to the 10% penalty.  If you are trying to have the tax withholding exactly match your increase in tax liability, you would need to determine your federal marginal income tax rate based on everything else on your federal tax return and add 10% for the penalty.  Utah has a flat tax rate of 4.85%, so your marginal state tax rate would be no more than that.  Ideally you would create a simulated tax return to determine your incremental tax that results from the distribution, which is most easily done with the CD/download version of TurboTax.

Given that it's so close to the end of the year, you'll need to decide if you want this distribution to be 2023 income (with tomorrow, December 29, 2023 being the last day to be able to obtain such a distribution) or 2024 income (with the distribution occurring next week or later).

Did you make a contribution for 2023?  If so, it might be beneficial to obtain a return of contribution instead of a regular distribution to avoid some or all of the early-distribution penalty.

Given that your Roth IRA contribution basis is $1,200, it seems a bit unusual (although not impossible, particularly if you have basis in taxable Roth conversions) that you would have much more than $1,200 available to distribute, so does it even matter much how much you have withheld for taxes?

[dalocalsiren]

@dmertz 

Thank you for responding to my question. I do appreciate your time.

I do want to clarify to make sure I understand what you're saying and to be honest I have a hard time understanding some of the terminology used because I don't dabble in my Roth IRA and I file taxes once a year so I'm going to try to interpret what you said. Also, not being mean or anything but could you dumb it down as if you're explaining it to a 5th grader? it'll help me be aware of the context.

Based on what you're saying, and I quote from your post: 

"to avoid having to pay more with estimated tax payments or a balance due on your tax return, or to avoid needing to annualize income on Schedule AI of Form 2210 to eliminate an underpayment penalty for earlier tax quarters." 

And yes, I don't want to get in trouble so if there are any additional taxes that I need to pay for both state and fed, then I rather know how much I need to withhold when it comes to doing my distributions.

I'm not doing any Roth conversions, this just a simple taking money out of my Roth IRA.  and to quote:

"you would need to determine your federal marginal income tax rate based on everything else on your federal tax return and add 10% for the penalty.  Utah has a flat tax rate of 4.85%, so your marginal state tax rate would be no more than that.  Ideally you would create a simulated tax return to determine your incremental tax that results from the distribution, which is most easily done with the CD/download version of TurboTax."

I do have Turbo Tax and have been getting my taxes done with them for several years now, is there a link for me on the TurboTax page where I can do a simulation of finding my federal marginal income tax rate along with the 10% penalty on top? Also, I haven't had a job for a year, so I'm not sure how this would work. I'm basically just finding out how much tax to withhold federally since the state tax for Utah is 4.85%.

and then lastly:

"Given that your Roth IRA contribution basis is $1,200, it seems a bit unusual (although not impossible, particularly if you have basis in taxable Roth conversions) that you would have much more than $1,200 available to distribute, so does it even matter much how much you have withheld for taxes?"

are you saying that even if I withdraw out more than $1,200 would it matter, given if I take an excess amount I would have to input all of this on Turbo Tax and it would just tell me how much I owe in both Fed and State along with the 10% on top?

Thank you kindly

[dmertz · Accepted solution]

If you have the CD/download version of 2023 TurboTax you can enter everything needed to prepare your tax return (not just the Roth IRA distribution) and see what TurboTax shows for your balance due for federal and state.  TurboTax will prepare Form 8606 Part III to calculate the taxable amount and will prepare Form 5329 Part I to determine the penalty, all leading to the determination of your balance due.  The Form 1099-R for the distribution from the Roth IRA will have the distribution amount in box 1, a blank box 2a, box 2b Taxable amount not determined marked and code J in box 7.

Of course this is only relevant if you get your distribution request to Fidelity before market-close tomorrow, otherwise it won't be 2023 income.