Can you clarify if I am paying 10% early withdrawal penalty on my IRA twice - once withheld by Fidelity at source when drawing and again, as Federal taxes?

[skil53]

I withdrew and received 10% less on the withdrawn amount from my IRA account last year. Although I entered the exact details of my 1099-R from Fidelity, Turbotax calculated this 10% penalty as Federal Tax due and I had to pay it again when filing my return. Will I get the withheld amount back as refund?  Thanks in advance for responding...

[Lisa995]

The 10% they withheld covers the 10% penalty, but then you still get taxed on that income in the tax bracket that all your income falls into....so generally, what they withhold on an early distribution doesn't cover all the tax liability.

That withholding should be shown on the tax return and gets applied against the tax liability...you don't pay it twice.

[skil53]

Thanks for the pointer. I thought that the withholding would offset the tax liability but this didn't seem to be the case. TT calculated that I owed 10% tax on my withdrawal which I had to pay while filing.  I am still not sure if I will get a refund of the tax I paid if the return has the withheld amount.

[Lisa995]

The tax return computes total tax liability (including any penalties on early withdrawals) and also includes all taxes paid (the withholding from any of your W2s and/or 1099s) to be applied against the tax liability.  

Lets pretend that you took an early withdrawal from your retirement account of $10,000 and they withheld 10% ($1000).   That $10,000 gets added to all your other income, and lets say once you add it to all your other income, you land in the 15% tax bracket...so that 10,000 gets taxed at 15% ($1500) + the 10% penalty ($1000).  So that additional income has now cost you $2500 in taxes....but you only had $1000 withheld...so you end up having to pay that additional $1500 on the tax return (or it will reduce any refund you have by that $1500)

Doe that make help it make better sense?    Pulling money early from a retirement account can be pretty expensive.

[dmertz]

Tax withholding is simply a down-payment on whatever tax liability is calculated on your tax return.  It doesn't apply to any particular item of income.  Regardless of how much was withheld for taxes from your IRA distribution, your tax liability is not determined until you prepare your tax return.  Whatever amount appears in box 4 of the Form 1099-R is credited on your tax return on Form 1040 line 16 to be subtracted from the overall tax liability determined on your tax return.

[skil53]

@Lisa995, thanks again, it does make sense. As you have commented, it is a steep price to pay.

@dmertz, understood. Thanks

[Lisa995]

solved in comments

[hwill2105]

I am 76 years old.