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mb87p11
New Member

I withheld 10% on all of my 1099R Income (box 4). However, 10% is still being deducted from my federal Refund. Please explain.

 
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MichaelDC
New Member

I withheld 10% on all of my 1099R Income (box 4). However, 10% is still being deducted from my federal Refund. Please explain.

 A 1099-R reports a distribution from a retirement plan, IRA, or annuity.

According to the IRS, and if this is the case, when you take a premature distribution (before your 59-1/2) from an IRA or pension plan, you pay both tax and a penalty of 10%. At the most, the plan administrator withholds 20% from these distributions, leading many to think that they have paid their taxes on this distribution. Some don't withhold anything.

If 20% is actually withheld and not a lesser amount, it covers your 10% penalty and a portion of your distribution. Rarely does this cover all the taxes since you probably are being taxed at a higher rate than 10%.

Example. On a $5,000 distribution, you may receive $4,000 after the withholding of $1,000 for taxes, although the entire $5,000 is taxable. Imagine you are in a relatively low 15% tax bracket. At 15% taxes plus 10% penalty, you would have to pay $1,250 (25% of $5,000). However, they only withheld $1,000, leaving you, in this example, $250 in the hole.

This is the best case scenario in a situation like this. The amount owed goes up the more distribution you take (getting you into a higher tax bracket) and by withholding less than 20%. A 25% tax bracket plus a 10% penalty in the example above leaves you owing $750 on a $5,000 distribution with 20% withheld.

Of course, the worst case scenario is taking a $5,000 with no withholding and having to pay $1,750 on taxes. Unfortunately, the government gets a big cut before you're 59-1/2.

There are exceptions to the penalty in the link below. You may possibly be able to take advantage of one of them.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

 Please feel free to post any additional details or questions in the comment section. 

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2 Replies
VolvoGirl
Level 15

I withheld 10% on all of my 1099R Income (box 4). However, 10% is still being deducted from my federal Refund. Please explain.

You didn't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½).  You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due.  The withholding will show up on 1040 line 64 or 1040A line 40.  The 10% penalty is on 1040 line 59.

It has to break out and show the 10% penalty separately on your return and then you get credit for all the withholding taken out on Line 64.
MichaelDC
New Member

I withheld 10% on all of my 1099R Income (box 4). However, 10% is still being deducted from my federal Refund. Please explain.

 A 1099-R reports a distribution from a retirement plan, IRA, or annuity.

According to the IRS, and if this is the case, when you take a premature distribution (before your 59-1/2) from an IRA or pension plan, you pay both tax and a penalty of 10%. At the most, the plan administrator withholds 20% from these distributions, leading many to think that they have paid their taxes on this distribution. Some don't withhold anything.

If 20% is actually withheld and not a lesser amount, it covers your 10% penalty and a portion of your distribution. Rarely does this cover all the taxes since you probably are being taxed at a higher rate than 10%.

Example. On a $5,000 distribution, you may receive $4,000 after the withholding of $1,000 for taxes, although the entire $5,000 is taxable. Imagine you are in a relatively low 15% tax bracket. At 15% taxes plus 10% penalty, you would have to pay $1,250 (25% of $5,000). However, they only withheld $1,000, leaving you, in this example, $250 in the hole.

This is the best case scenario in a situation like this. The amount owed goes up the more distribution you take (getting you into a higher tax bracket) and by withholding less than 20%. A 25% tax bracket plus a 10% penalty in the example above leaves you owing $750 on a $5,000 distribution with 20% withheld.

Of course, the worst case scenario is taking a $5,000 with no withholding and having to pay $1,750 on taxes. Unfortunately, the government gets a big cut before you're 59-1/2.

There are exceptions to the penalty in the link below. You may possibly be able to take advantage of one of them.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

 Please feel free to post any additional details or questions in the comment section. 

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