Large IRA Withdrawal

Retmil · ‎January 10, 2023

Help. Age 69 with pension and supporting IRA of about $125K. Overall tax novice but long time Turbotax user. Need cash upfront and trying to decide if it is better to withhold Fed and state taxes upon IRA distribution or wait until we file next year to pay what we are owed. This distribution would just about double our income. What is the best way to move money out of the IRA as quickly as we can without falling into a tax problem hole. Worried about penalties (if any), AMT, over estimating withholding (percentages based on our turbotax generated rate from last year)- basically everything.

Trying to get input on recommendations for what to do to help me work through this. Thanks

Critter-3 · ‎January 10, 2023

You can :

1) have enough taxes withheld at the distribution to cover all the estimated taxes owed

2) wait and pay on your return but you may have underwithholding penalties

3) have at least enough withheld to cover the prior year's tax liability (or make estimates) ... you would still owe on the return but no penalty would be accessed... see below ... the 2022 program can help you estimate the payment or withholding you may need for 2023 ...

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

Opus 17 · ‎January 10, 2023

If you pay too much estimated tax, that doesn't cause any other problems, AMT or anything else. It's just withholding, and if you overpay, you get the difference back as a refund.

You are required by law to make estimated payments. However, the IRS will not enforce a penalty as long as you pay enough into the system to satisfy one of the rules quoted above. If you correctly calculate and pay the bare minimum, you won't be penalized but you will owe the rest when you file. Again, paying too little doesn't change AMT or anything else, it just means you owe a big bill when you file.